The Consumer Price Index (CPI) is an economic indicator that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the United States and various groups of products and services, such as food, housing, apparel, transportation, and medical care. The CPI is widely used as a measure of inflation, providing a gauge for the effectiveness of government economic policy and serving as a guide for adjusting income payments. For example, the Social Security Administration uses the CPI to adjust benefits for the cost-of-living increases.
The calculation of the CPI involves surveying prices of a basket of goods and services every month in specific urban areas, which represent the consumption pattern of a typical consumer. These goods and services are divided into categories and weighted according to their importance in an average consumer's daily expenditures. The prices of about 80,000 items are collected each month from about 6,000 housing units and approximately 24,000 retail establishments—department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments—all over the United States.
There are several different CPI measures produced by the Bureau of Labor Statistics (BLS), including the CPI for All Urban Consumers (CPI-U), which covers approximately 93 percent of the total U.S. population. Another significant measure is the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers 29 percent of the population and is used primarily for wage negotiation purposes. These indices can be presented on either a seasonally adjusted basis, to remove the effects of seasonal changes in prices, or not seasonally adjusted, to provide a clearer view of underlying inflation trends.
Understanding the CPI is crucial for economic planning and personal financial decisions. For example, lenders, investors, and credit issuers use the CPI to set interest rates on loans and mortgages. Moreover, the inflation rate derived from the CPI influences the purchasing power of consumers, affecting their real income and spending capacity. Inflationary pressures indicated by a rising CPI can prompt central banks to adjust monetary policies, such as altering interest rates. The CPI is not just a statistical measure, but a dynamic tool that impacts governmental policy, business decisions, and individual financial planning on a broad scale.