Consumer Price Index – CPI Definition & Uses
By Kunal Vakil
What is the CPI?
The consumer price index, aka. CPI, is the key gauge for inflation; it measures price increases and decreases on common group of consumer goods and services on a monthly basis. The CPI is calculated by taking a weighted average of price change for a pre-determined group of goods. The goods are weighted in order of their importance. The consumer price index is very similar, but not to be confused with, to the cost of living index which allows for substitutions of the items as prices move higher or lower.
The BLS, or bureau of labor statistics, publishes CPI data in three main categories: CPI-U (CPI for urban consumers), C-CPI-U (chained CPI for all urban consumers), and CPI-W (CPI for Urban Wage Earners and Clerical Workers). CPI-U, as the name suggests, represents the purchasing habits of consumers in urban or metropolitan areas. CPI-W calculates CPI for a portion of the urban population; the population used in this study requires an urban area to have a minimum of 2500 residents to be considered. Finally, the C-CPI-U is the newest CPI gauge and also the one that is supposed to adapt to consumer needs over time. The basic premise of this measure is that consumers will alter spending habits over time to accommodate for a changing marketplace or more likely a change in price.
Another key indicator that many economists review is the Core CPI; this sub-index measures CPI leaving out the two most volatile components, food and energy. This allows economists to truly understand if goods and services which have steady rises in price are starting to accelerate faster than the average rate.
How Can you Use the CPI?
The most common use of the CPI data is to asses the economic landscape and primarily inflation. The CPI also has large ramifications on consumer income. Social Security, Federal Pension benefits, Food Stamp benefits, and even Treasury Inflation Adjusted Bond securities (TIPS) are adjusted up or down using CPI as the guide. Thankfully, the consumer price index is assessed annually by the IRS to determine if changes need to be made to the tax brackets or even standard deductions.
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Kunal Vakil is the co-founder of mysmp.com (My Stock Market Power) which provides free trading articles to investors.
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