What Is CPI and Why Should You Care?

On days like today, the financial news media explodes with articles about changes in the overall cost of living, based on inflation (and deflation) in prices paid by consumers. That’s just the quick answer to the question, “What is CPI?”

Short for the consumer price index, CPI is one of the most watched federal economic indices to come out on a monthly basis.

The end result is a single figure but it represents the prices of 80,000 different consumer goods and services, showing the average rate of inflation in all of them over time.

What Is CPI?

The U.S. Bureau of Labor Statistics calculates these figures based on retail prices paid by consumers in 87 different greater metropolitan areas. Note that wholesale prices are part of another index altogether, and subsets of it comprise still other federal indices.

Also excluded from CPI: the sale price of homes. Instead, the index calculates the monthly equivalent of home dwelling costs based on rents. While some call this misleading, there are other federal economic indices that provide more detail on housing.

CPI data comes from 12,000 households that keep diaries about their spending. BLS also conducts quarterly interviews with them all to determine how to calibrate the relative importance of different items in the index.

Lots of Retailers

The agency rounds out this information with consumer-facing prices supplied by 23,000 retail and services companies.

All told, CPI provides a measurement of inflation that is one of the data points the U.S. Federal Reserve Bank uses to determine whether it needs to adjust interest rates.

CPI also feeds into calculations of the U.S. gross domestic product, the most widely used economic indicator and one that the Fed in turn also uses in its assessments for monetary policy.

Other Uses for CPI

Other federal agencies use the CPI as the basis for inflation rate adjustments in the amount of money awarded for federal programs including Social Security, disability, welfare and even veterans benefits.

Recent CPI announcements have revealed that inflation is beginning to pick up speed, possibly crossing into unhealthy territory — and this is contributing to fluctuation in the stock market.

When the stock market fluctuates, certain types of commodities tend to capture more interest — especially precious metals.

Although at first it might seem like commodities have a wee bit of overlap with CPI, they’re actually more of a wholesale type of indicator.

But back to CPI showing that inflation is accelerating, it’s been moving faster in some parts of the economy than others. Energy prices have been going up more than twice as fast as all other types of consumer prices.

Although looking at the price of oil and gasoline might yield more detail on energy inflation, the view of it within CPI shows how consumers are shouldering it in the context of other expenditures.

In sum, CPI provides a national average for inflation across all consumer products — so when you see an increase in the price of something you buy regularly, compare the percent increase with CPI to determine going up at the same rate as everything else.

Readers, where are you seeing inflation the most right now?

Jackie Cohen

Jackie Cohen is an award winning financial journalist turned turned financial advisor obsessed with climate change risk, data and business. Jackie holds a B.A. Degree from Macalester College and an M.A. in English from Claremont Graduate University.