What is the Consumer Price Index?

By Nan Werther , last updated July 6, 2011

The consumer price index, also referred to as the CPI, is a measurement of the weighted average of prices of consumer goods and services bought by households in the United States. Defined and calculated by the U.S. Bureau of Labor Statistics, the consumer price index is found for a given good by taking price changes for that item over time and averaging them. Thus, the CPI is a statistical estimate that is constructed using the prices, collected periodically, of a sample of goods. Goods can include, but are not limited to, transportation, medical care, food, and Beanie Babies.

The consumer price index is used by agencies and individuals in many different ways. Sometimes referred to as "headline inflation", consumer price index is primarily used to assess or determine changes in prices associated with the cost of living. The U.S. Bureau of Labor Statistics gathers this information by measuring two different statistics: the CPI for urban wage earners (those living in cities) and clerical workers (classified as CPI-W) and the linked consumer price index for all urban consumers (otherwise known as the C-CPI-U). Of the two of these, it is thought that the more accurate reflection of differences in consumer purchasing is the latter, as it accounts for 87 percent of the population's spending.

The CPI is used by many businesses, organizations, and agencies as a way to adjust for the cost of living and the relative value of wages, salaries, and pensions. It can also be used to regulate values in currency. Another one of the foremost uses of the consumer price index is to identify periods of inflation or deflation within the economy. Large rises or increases in the consumer price index in a short period of time would indicate, typically, a period of inflation while alteranately a large drop in the consumer price index would mark a period of deflation. Along with the population census and the National Income and Product Accounts, the consumer price index is one of the most watched economic statistics.

Computed monthly, or sometimes quarterly in some countries, the consumer price index includes a variety of factories in determining the final output. Scanner data from stores is helping to make weighting information (the relative value of a good) available even in highly-detailed computations. Prices are then indexed and compared each month with the tabulated price-reference. The CPI is determined against an index of 100, set in 1982.

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