The consumer price index measures the change in average price paid by consumers for a set of goods and services that represent regular expenses, like groceries or gas. The CPI is used to track the real-world impacts of inflation on consumers. Every month, the U.S. Bureau of Labor Statistics releases the updated CPI data, showing monthly and annual changes in average prices.
The most recent CPI report showed the index increased 0.4% from September to October. Over the previous 12 months ending in October, the index rose 7.7%. This was the smallest 12-month increase since January 2022, according to the BLS.
Typically, Americans can expect the CPI to increase between about 1% and 4% each year, based on data from the last couple of decades. But there are sometimes periods of high inflation, indicating average prices for common goods and services are rising more than usual.
During the pandemic, the annual inflation rate stayed below 4% until April 2021. That month, the CPI increased 4.2% over the previous year and continued to rise until it appeared to peak in June 2022, when the year-over-year increase was reported at 9.1%.
CPI vs. PPI
The producer price index also is a measure of inflation calculated by the BLS. However, the PPI focuses on the change in prices from the seller’s point of view, taking into account how much sellers pay producers for their goods. This index tracks average price changes for domestically produced goods, services and construction.
CPI vs. PCE
Like the CPI, the personal consumption expenditures, or PCE, is a price index that measures changes in how much consumers pay for goods and services. However, the PCE price index is calculated by a separate federal agency called the Bureau of Economic Analysis.
The BEA uses a different formula to calculate inflation (and deflation, when prices decrease) and weighs categories of goods and services differently.
The two indexes also have different scopes. Unlike the CPI, the PCE includes spending done on behalf of consumers. One common example is medical spending. The CPI takes into account only what a household spends out of pocket on medical care. The PCE price index records that spending as well and adds what employers or government programs pay on consumers’ behalf through insurance plans. Because the PCE and CPI differ in their formula, weighting, scope and other effects, their results are different. The Federal Reserve prefers to use the PCE price index to measure inflation. This comes into play when the Fed makes monetary policy decisions, such as whether to raise the federal funds rate.
How is CPI calculated?
There’s a lot going on behind the monthly CPI report. The BLS collects price data each month in 75 different urban areas. The bureau gathers information from about 6,000 housing units and 22,000 retail businesses, including grocery stores, department stores and gas stations, among others.
The BLS groups goods and services into categories. Typically, you’ll see the index reported for all items. But it’s also common to see the CPI reported without energy or food price changes, because those categories tend to be more volatile — this version of the index is known as “core inflation.”
Using the collected data, the CPI is calculated with complex statistics. You’ll most commonly see it referred to by the rate of change during a specific time period. The CPI rate is calculated by determining the current value of a particular basket of goods and services, then dividing it by the value of those same goods and services from a year or month prior. The result is then multiplied by 100.
Everything included in the index is mathematically weighted so that each item or group’s effect on the index reflects its relative importance to consumers. The table below shows the relative importance assigned to some categories in the most recent CPI report.
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Relative importance in CPI |
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|---|---|
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Energy (fuel, utilities) |
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Medical care services |
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Transportation services (insurance, airfare, etc.) |
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Source: Bureau of Labor Statistics; CPI report for October 2022
How is CPI used?
The CPI is closely watched as an economic indicator to measure inflation. But that’s not its only purpose.
Private employers may use the CPI to determine how much to pay workers. The federal government also uses the index to reset eligibility levels for government assistance programs, federal tax brackets and cost-of-living increases. For example, the Social Security Administration announced in October the biggest cost-of-living increase in 40 years. SSA bases its annual adjustment on the CPI.
Additionally, anyone can use the index to calculate buying power by adjusting historical values to see how they stack up in today’s dollars. For example, in 1972, median household income was $11,120, according to the U.S. Census Bureau. Factoring in inflation, that income had the same buying power as $80,630 in today’s dollars, according to the CPI inflation calculator on the BLS website.
Next CPI report
The BLS releases a new CPI report each month showing how the index changed in the previous month. The next CPI report will be released Dec. 13. It will detail how average prices changed in November.
This post was originally published on Nerd Wallet
