A consumer price index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households. Changes in the CPI are used to assess price changes associated with the cost of living; the CPI is one of the most frequently used statistics foe identifying periods of inflation or deflation.
The CPI is a statistical estimate made to using the prices of a sample of representative items whose prices are collected periodically. Sub-indices and sub-sub-indices are computed for different categories and sub-categories of goods and services, all of which are combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index.
The U.S. Bureau of Labor Statistics reports the CPI on a monthly basis. Two types of CPIs are reported each time. The CPI-W measures the Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-U is the Consumer Price Index for Urban Consumers. It accounts for 89% of the U.S. population and is the better representation of the general public. The CPI-W is a subset that covers 28% of the U.S. population.
What is in the CPI?
The consumer price index statistics cover professionals, self-employed, poor, unemployed and retired people in the country. People not included in the report are non-metro populations, farm families, armed forces, and people serving in prison and those in mental hospitals.
The goods and services included in the CPI are broken into eight major groups:
- Food and beverages
- Medical Care
- Education and communication
- Other goods and services
Calculating the CPI for multiple items
Many but not all price indices are weighted averages using weights that sum to 1 or 100.
Example: The prices of 85,000 items from 22,000 stores, and 35,000 rental units are added together and averaged. They are weighted this way: Housing: 41.4%, Food and Beverage: 17.4%, Transport: 17.0%, Medical Care: 6.9%, Other: 6.9%, Apparel: 6.0%, Entertainment: 4.4%. Taxes (43%) are not included in CPI computation.