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What is the Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures the average change over time in the prices consumers pay for a basket of goods and services. It is widely used as an inflation indicator and one of the world’s most widely watched economic indicators.
The basket of goods and services included in the CPI represents the typical purchases of a typical urban consumer. It intends to reflect the cost of living for a typical household. The basket is typically updated periodically to reflect changes in consumer spending patterns and the prices of the goods and services consumed.
The Bureau of Labor Statistics (BLS) in the United States calculates the CPI monthly. It publishes data for various categories, such as food, housing, transportation, medical care, and other goods and services. The BLS also calculates a core CPI, which excludes food and energy prices, as these prices can be more volatile and subject to short-term fluctuations.
The CPI is used to make cost-of-living adjustments to various financial instruments, such as pensions, Social Security payments, and income tax brackets, as well as to evaluate changes in the cost of living. It is also used to adjust wages and salaries, measure inflation, and make monetary policy decisions by central banks and governments.
6 Types of CPIs
There are several different types of Consumer Price Indices (CPIs), including:
Headline CPI: This is the most reported CPI and measures the average change over time in the prices of a basket of goods and services consumed by a typical household.
Core CPI: This is a version of the CPI that excludes the prices of volatile items such as food and energy. The core CPI is used to understand better underlying inflation trends, as food and energy prices can be subject to short-term fluctuations.
Urban Consumer Price Index (UCPI): This measures the average change over time in the prices of goods and services consumed by urban consumers and is used to adjust the cost of living for urban populations.
Rural Consumer Price Index (RCPI): This measures the average change over time in the prices of goods and services consumed by rural consumers and is used to adjust the cost of living for rural populations.
National Consumer Price Index (NCPI): This measures the average change over time in the prices of goods and services consumed by consumers across a nation.
Regional Consumer Price Indices (RCPIs): These are versions of the CPI that are specific to a particular region or city and measure the average change over time in the prices of goods and services consumed by consumers in that region.
In summary, different types of Consumer Price Indices exist to capture different aspects of consumer inflation and to provide a more nuanced understanding of changes in the cost of living for different populations.
Annual CPI Formula
The formula for calculating the annual Consumer Price Index (CPI) is as follows:
Annual CPI = (Price of a basket of goods and services in current year / Price of a basket of goods and services in the base year) x 100
Where:
Price of a basket of goods and services in the current year: The price of a basket of goods and services that a typical household would purchase in the current year.
Price of a basket of goods and services in a base year: The price of the same basket of goods and services in a reference or base year.
The result represents the percentage change in the cost of the basket of goods and services from the base year to the current year. The base year is typically set to 100, so the annual CPI is expressed as an index number with the base year equal to 100.
For example, if the price of the basket of goods and services in the current year is $1,200 and the price of the same basket in the base year was $1,000, the annual CPI would be 120, meaning that the cost of living has increased by 20% from the base year to the current year.
CPI Categories
The Consumer Price Index (CPI) measures changes in the prices of household goods and services. Grouping goods and services calculate it into categories, also known as commodity groups or expenditure classes. The most common categories used in the calculation of the CPI include the following:
Food and Beverages: This category includes all food items, such as groceries, restaurant meals, and alcoholic beverages.
Housing: This category includes all costs associated with housing, such as rent or mortgage payments, property taxes, maintenance and repairs, and utilities.
Apparel: This category includes clothing, footwear, and accessories.
Transportation: This category includes all costs associated with transportation, such as fuel, maintenance, and vehicle purchases.
Medical Care: This category includes all costs associated with health care, including medical services, prescription drugs, and hospital care.
Education and Communication: This category includes education costs, such as tuition and fees, and communication costs, such as telephone and internet services.
Recreation: This category includes all costs associated with recreation, such as entertainment, reading materials, and sports equipment.
Other goods and services: This category includes all remaining goods and services not included in the other categories, such as personal care, tobacco, and miscellaneous expenses.
These categories help break down the overall cost of living into specific areas and provide a more nuanced understanding of how different economic parts impact household budgets.
When is the CPI released?
The Consumer Price Index (CPI) is usually released by the Bureau of Labor Statistics (BLS) in the United States on the last business day of each month.
