Americans are concerned any time inflation starts to substantially increase. It means the prices they’ll face at grocery stores, gas stations, and retail shops could start to outpace how much money they earn, making it harder to afford their daily necessities.
But “inflation” is a phenomenon that can be measured many different ways. The Consumer Price Index (CPI) is the most common measurement and is therefore closely watched by government officials, businesses, consumers, and the Federal Reserve.
The CPI, produced and published by the Bureau of Labor Statistics (BLS), measures changes in the prices paid by urban consumers (who represent over 90 percent 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 others items in over 200 categories. It includes about 94,000 prices and 8,000 indicators of housing costs every month.
The BLS selects items for the CPI based on detailed information from Americans about what they actually 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 about 50,000 landlords, homeowners, and tenants. The index also includes user fees, such as for water and sewer service, and sales and excises taxes, like the extra tax governments impose on tobacco and alcohol.
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 commonly bought cheese in the most commonly 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 or that exclude different kinds of goods and services.
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 in the midst of the Great Recession and from February to May 2020 during the early part of the pandemic.
CPI grew quickest during the late 1970s and early 1980s. Its growth slowed in the late 1980s up until the pandemic: it began to rise quickly in 2021.
The Federal Reserve tracks the CPI closely and has targeted a 2 percent inflation rate since the 1980s. But CPI isn’t only used to track inflation. In 1973, 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. 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. Many union contracts also tie wage increases to increases in the CPI.
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