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Economy 101: Consumer Price Index

Each month, the United States Bureau of Labor Statistics (BLS) releases the latest Consumer Price Index (CPI). You'll typically hear it expressed in terms of a monthly increase or decrease - 0.8 percent decrease in the month of December, 0.3 percent increase during January. This number is a measure of the change in price that an average consumer pays for a pre-defined "market basket" of goods and services. As such, CPI is sometimes referred to as the cost-of-living index, because it literally measures the average consumer's cost of living. It is also one of the key measurements of inflation.

How does the BLS define this "market basket" and the goods and services that go into it? Every couple of years they conduct what's known as the Consumer Expenditure Survey, the information from which decides the market basket of goods and services. Through interviews and expenditure diaries, approximately 7,000 participants nationwide log information about their expenditures and their income. This data not only determines what is in the market basket, but also the "weighting" that each item in the basket receives, based upon the percentage it represents of the average American's income.

The market basket represents all of the goods and services purchased by the average American family, with the exception of investment items such as stocks and real estate. It contains roughly 80,000 items that are divided up into more than 200 categories, which are then further arranged into eight different groups. The eight groups are as follows:

  • Foods and Beverages
  • Housing
  • Apparel
  • Transportation
  • Medical Care
  • Recreation
  • Education and Communication
  • Other Goods and Services

Every month, the BLS sends certified data collectors called economic assistants out to visit or call thousands of retail stores and service establishments across the country. Armed with tablet computers, these economic assistants gather the prices of all of the items in the market basket that's right, all 80,000 items. They must find and price each of these based upon minute specifications, down to such details as how many pages a particular spiral notebook might have and whether it is wide or narrow-ruled.

The economic assistants then send this data back to BLS analysts, who carry on this data-intensive process by crunching the numbers. Using the new data and the weights calculated for the items, they determine the change in cost of the items and, collectively, of the market basket itself. The resulting figure describes the monthly increase or decrease of cost of living for the average American family.

While the monthly change is relatively easy to understand (ie: up 0.3%), the index itself is more complicated. For instance, CPI in January 2009 was 211.143. What does that mean?

In the United States, current CPI is derived with a reference base set in 1982-1984. The average price level during the base period is set to 100, making subsequent CPI measurements easy to interpret at a glance. For instance, a CPI of 110 indicates a 10% increase in price since the reference period; a CPI of 150 indicates a 50% increase in price since the reference period. This makes CPI a key measurement of inflation, and a very useful economic indicator in general.

If you're interested in learning more about CPI, the Bureau of Labor Statistics has excellent resources at www.bls.gov/cpi.



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