What is the Consumer Price Index (CPI)?

Consumer Price Index

The Consumer Price Index (CPI) is a measure of the average change in prices paid by consumers for a basket of goods and services.

The Consumer Price Index (CPI) is a measure of the average change in prices paid by consumers for a basket of goods and services. The CPI is used to calculate inflation, which is the rate at which the prices of goods and services rise over time. The CPI is released monthly by the Bureau of Labor Statistics (BLS). It is one of the most closely watched economic indicators, as it can have a significant impact on economic conditions and monetary policy.

consumer price index (CPI)
Source: Investopedia

How is the CPI market based determined?

The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. So, there is a time lag between the expenditure survey and its use in the CPI.

Consumer Price Index Formula

The Consumer Price Index (CPI) is a measure of the average change in prices paid by consumers for a basket of goods and services. The CPI is used to calculate inflation. The CPI formula is:

CPI = (Price of goods in current period / Price of goods in base period) x 100

where the price of goods is the weighted average of prices for all goods and services in the CPI basket.

The CPI measures the average change in prices for a fixed basket of goods and services from one period to another. Hence, The fixed basket is representative of consumption by urban households.

What categories comprise the Consumer Price Index?

The CPI includes six categories: 

  1. Food and beverage
  2. Housing
  3. Apparel
  4. Transportation
  5. Medical care, and 
  6. Recreation. 

Each category is further divided into subcategories. For example, the food and beverage category includes food at home and food away from home.

Limitations of Consumer Price Index

CPI does not take quality into account. This is a big problem, especially with electronics. A new TV might cost twice as much as an old one, but it will also be much better quality.

CPI is based on the prices of a fixed “basket” of goods and services. The basket is designed to represent the typical consumption habits of a “typical” urban consumer. But what if the basket doesn’t match your consumption habits?

The CPI basket includes things that people have to buy, like food and housing. But it also includes things that people choose to buy, like entertainment and vacations. Furthermore, an increase in the price of housing will have a bigger impact on CPI than an increase in the price of tickets to a baseball game. Thus, this means that CPI might not be a good measure of how much prices have changed for you personally.

What is the current Consumer Price Index?

The Consumer Price Index for All Urban Consumers (CPI-U) increased 8.2% over the last 12 months to an index level of 296.808.

If you are keen, check out our articles on other analysis: This is what FIRE meant to me, What is the Fear & Greed Index and 5 Key Events in the market this week (17th Oct – 21st Oct).

Disclaimer: The information provided by LearnToInvest serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.

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