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The Consumer Price Index (CPI) is an official measurement of the rate of inflation and the changes in a currency’s purchasing power. The CPI expresses the current prices of a set number of goods and services during the exact period in previous years. This illustrates the effects of inflation on consumers’ purchasing power. The Bureau of Labor Statistics (BLS) maintains the CPI on their website.
The Basics
Every month, economists employed through the Bureau of Labor Statistics, which is part of the U.S. Department of Labor, release a CPI update. This measures the average price changes for a designated set of consumer goods and services that are paid by urban households. These expenditure items are categorized into about 200 items that divided between eight groups. The major consumer categories include apparel, housing, recreation, education, transportation, medical care and food and beverages.
The minor percentage change in the CPI every month provides economists with a measure of inflation that is used to set the official poverty level. The CPI also used as a way to adjust income payments to millions of union workers whose wages are tied to the slowly shifting CPI. The CPI is not a complete cost of living index because it does not take into account other factors that affect consumer well-being and personal finances, such as health, safety and local environment.
Urban Households
The BLS measures the CPI for two population groups: All Urban Consumers, which is expressed through the CPI-U, and Urban Wage and Clerical Workers, which is expressed through the CPI-W. The CPI-U measures the price inflation experienced by residents of urban areas, which represents almost 87 percent of the U.S. population. The CPI-W measures the prices that certain consumers within the CPI-U population pay.
These are urban residents who live in households that earn over half of their income from hourly occupations and have at least have one earner who has employed for at least 37 weeks during the previous year. The CPI-W represents approximately 32 percent of the U.S. population. The urban households surveyed include white collar workers, professionals, poor people, the self-employed and the unemployed. The CPI-U is generally used more because it covers the biggest population group. The CPI-W tends to be used to make cost-of-living adjustments for union labor contracts.
What are the Benefits?
The CPI’s selection of goods and services, which is commonly referred to as the market basket, is an actual representation of real consumer purchasing patterns. By comparing average prices and price trends over different years, economists can accurately calculate the inflation rate. This data is extremely influential with government agencies and programs, such as those that provide subsidized housing and college loans.
The CPI is also an excellent economic predictor because historical inflationary trends can reveal which factors, such as consumer or government spending, contribute to inflation or deflation. The CPI helps government economists adjust fiscal policies by easing the money supply or raising interest rates. The governments must always monitor inflation because it is an important indicator of the nation’s economic health.
The Consumer Price Index is the most popular standard to measure price inflation for urban consumers.
