Consumer Price Index

The Consumer Price Index (CPI) is an economic indicator that shows how the prices of a basket of goods and services that households buy have changed over time. It is used to track inflation, which is the rate at which the overall price level of goods and services is increasing over time.

CPI calculation

The CPI is calculated by taking the price of a basket of goods and services and comparing it to the price of the same basket in a base year. The basket of goods and services is selected to represent the consumption patterns of a typical household, and is often referred to as the "market basket." The market basket typically includes items such as food, housing, transportation, healthcare, and other goods and services.

The Bureau of Labor Statistics (BLS) in the United States, calculates and publishes the CPI data on a monthly basis. The BLS uses a sample of prices from around the country to estimate the change in the overall price level. It also breaks down the data by different regions, by urban and rural areas, by demographic groups, and by different types of goods and services.

CPI as an indicator

The CPI is widely used as an indicator of inflation because it reflects the change in the cost of living for households. It is also used to adjust other economic indicators, such as wages, pensions, and government benefits, to account for changes in the cost of living. Some government agencies use the CPI to adjust tax brackets and other parameters to account for inflation.

It's important to note that the CPI is not a perfect measure of inflation, it has some limitations. One of them is that it only measures the changes in the prices of goods and services that are purchased by households, it does not include investments or assets. Additionally, the CPI does not take into account changes in the quality or quantity of goods and services. So, it may not capture the full extent of changes in the cost of living.

Usage

In summary, the CPI is an economic indicator that measures the change in the price of a basket of goods and services consumed by households. It is used to track inflation, which is the rate at which the overall price level of goods and services is increasing over time. The CPI is widely used as an indicator of inflation and it is also used to adjust other economic indicators, such as wages, pensions, and government benefits, to account for changes in the cost of living.