What is the Consumer Price Index, and what does it mean for the economy?

Rising inflation can have a direct impact on the lives of Americans. It means increases in prices at grocery stores, gas stations, and retail shops, making it harder to afford their daily necessities, particularly if wage increases don’t keep up.

Inflation is a phenomenon that can be reported using various measures, the most common of which is the rate of change in a measure called the Consumer Price Index (CPI).

What does the CPI measure?

The CPI, produced by the Bureau of Labor Statistics (BLS), measures changes in the prices paid by urban consumers (who are over 90% of the population) for a particular group of goods and services. The CPI looks specifically at the prices of apparel, education and communications, food and beverages, housing, medical care, recreation, transportation and other items in over 200 categories.

What is the difference between CPI and inflation?

The CPI is reported monthly alongside the “inflation rate,” which, though reported monthly, is a measure of percentage change in the CPI in the last year.

What items does the CPI track?

The BLS selects items for the CPI based on detailed information from Americans about what they buy, gathered through tens of thousands of weekly diaries and interviews with BLS employees. The Bureau calculates home prices and rent costs through surveys of people living in houses, apartments, and shared spaces. The index also includes user fees, such as for water and sewer service, and sales and excise taxes for specific items, like the extra tax governments impose on tobacco and alcohol.

Tracking the price of cheese

When a new item starts coming up in those diaries and interviews, a data collector working for the BLS goes into a store and picks one of the most popular varieties to enter into the CPI sample. For example, when selecting cheese, the data collector will pick the most often bought cheese in the most often purchased size — say, a 6-ounce package of cheddar. That cheddar will then be tracked at the same grocery store every month to see if its price goes up or down. BLS data collectors track the prices of about 80,000 items each month. Every item stays in the sample until it’s rotated out after four years.

The price change for each product in the sample is then given a weight based on its importance and Americans’ spending habits. Given the careful selection of products and the weight each is given, the BLS then estimates price changes for all kinds of, say, cheese in all grocery stores across the country.

The BLS also publishes different CPI indexes that look just at specific geographic areas, as well as individual indexes for specific item categories.

How has the CPI changed over time?

The CPI has risen in the post-World War II period, sometimes quickly, sometimes slowly. Some notable outliers include the deflationary period from July to December 2008 during the Great Recession and from February to May 2020 during the COVID-19 pandemic.

CPI grew by historically high rates during the late 1970s and early 1980s before slowing in the late 1980s and up until the current decade. Late 2021 through early 2023 was a period of high inflation; the annual rate in 2022 was its highest since the early 1980s.

What is a good inflation rate?

The Federal Reserve tracks the CPI closely and has officially targeted a 2% inflation rate since 2012.

How else is the CPI used?

In addition to being a measure of the health of the economy, the CPI affects income eligibility cutoffs for many government programs — if they’re indexed to inflation, they will rise or fall based on the CPI — as well as the government’s official poverty measure and inflation-indexed tax rates. In 1975, Congress tied the annual increase in Social Security payments to increases in the CPI, which means that the yearly automatic cost of living adjustment is based on this data. Many union contracts also tie wage increases to increases in the CPI.

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