Consumer Price Index Definition:
The Consumer Price Index, or CPI, is a monthly measurement of inflation. It reports on the price changes of 80,000 items that represent a cross-section of goods and services purchased by urban households. These metropolitan consumers represent 87% of the U.S. population.How the Consumer Price Index Is Calculated:
The CPI is measured monthly by the Bureau of Labor Statistics (BLS). The agency collects price information from 23,000 retail and service businesses. The businesses chosen are the types frequented by a sample of 14,500 families. The CPI includes sales taxes, but excludes income taxes and the prices of investments such as stocks and bonds. The complete list of everything it does measure, as well as the change in price for each item in 26 of the 87 cities measured, is on the BLS website.More importantly, it also does not include sales price of homes. Instead, it calculates the monthly equivalent of owning a home, which it derives from rents. This is very misleading, since rental prices are likely to drop when there is high vacancy, usually when interest rates are low and housing prices are rising. Conversely, when home prices are dropping due to high interest rates, rents tend to increase. Therefore, the CPI is likely to give an inaccurately low reading when home prices are high (and rents are low), and an inaccurately high reading when home prices are low (and rents are high).
Why the CPI is Important:
The CPI measures inflation, which is one of the greatest threats to a healthy economy. It is used by the Federal government to determine whether economic policies need to be modified. Second, the CPI is also used to adjust prices in other government economic indicators, such as GDP. Third, the index is used to adjust Social Security and other government benefit programs.Core Consumer Price Index:
Two measures of inflation are often reported: core, which does not include food and energy cost, and non-core, which includes everything. Core CPI is important because this is what the Federal Reserve looks at to decide whether or not to raise the Fed Funds rate. The Fed uses the Core CPI because food and energy, specifically gasoline, are so volatile and the Fed's tools are so slow-acting. Therefore, inflation could be high if gas prices have increased dramatically, but the Fed would not react until those increases have trickled through to the prices of other goods and services.Historical Consumer Price Index:
Historical CPI numbers can best be found on the BLS website. The agency provides a history of the Consumer Price Index for every month since 1912. The monthly history of the core CPI is available for every month since 1956. The history of CPI by city or by product category can also be selected. (Most Requested Statistics. CPI history is also available by monthly changes or year-to-year changes. (CPI website, CPI-U, US City Average, All Items: Historical Numbers)(Updated May 15, 2009)
