Consumer price index is a measure of the average change in price for goods and services. These items are regular expenses such as groceries and gas. CPI measures the real-world effects of inflation on consumers. The U.S. Bureau of Labor Statistics publishes the most recent CPI data every month. It shows monthly and annual changes of average prices.
According to the most recent CPI report, the index rose 0.4% between September and October. The index was up 7.7% in the 12 previous months that ended in October. According to the BLS, this was the lowest 12-month increase in 12 months since January 2022.
Based on data over the past two decades, Americans can typically expect that the CPI will rise between 1% and 4.4% annually. However, there are times when inflation is high. This means that the average price of common goods and services is rising faster than normal.
The annual inflation rate was below 4% during the pandemic until April 2021. The CPI rose 4.2% in April 2021 compared to the previous year, and then continued rising until June 2022 when it reached a peak of 9.1 span>
CPI vs. PPI
BLS also calculates the producer price index, which is an indicator of inflation. The PPI, however, focuses on price changes from sellers’ perspectives, considering how much producers pay for their goods. This index tracks the average price change for domestically manufactured goods, services, and construction.
CPI vs. PCE
The personal consumption expenditures (or PCE) is an index of price changes that measures the change in the prices consumers pay for goods or services. It is similar to the CPI. The Bureau of Economic Analysis, however, calculates the PCE price index.
The BEA uses an alternative formula to calculate inflation and deflation (when prices fall) and weights different categories of goods and service differently.
Both indexes have different scopes. The PCE, unlike the CPI includes spending made on behalf of consumers. Medical spending is a common example. The CPI only takes into consideration what a household spends on medical care out of pocket. The PCE price index also records this spending and adds the amount that government programs or employers pay to consumers through insurance plans. The results of the PCE price index and CPI are different due to differences in their formulas, weighting, scope, and other effects. To measure inflation, the Federal Reserve prefers to use PCE price index. This is important when the Fed decides whether to raise its federal funds rate.
How does CPI get calculated?
The monthly CPI report is complex. Each month, the BLS collects prices data from 75 different urban areas. The bureau collects data from approximately 6,000 housing units as well as 22,000 retail businesses (including grocery stores and gas stations), among other things.
The BLS divides goods and services into different categories. The index will typically be reported for all items. It is also quite common to see the CPI report without food or energy price changes. These categories are more volatile and this version of the index, “core inflation,” is called.
The complex statistics used to calculate the CPI are based on the data collected. It is most often referred to as the rate of change over a particular time period. CPI rates are calculated by taking the current value for a basket of goods or services and then subtracting it from the value of the same goods or services one year ago. The result is multiplied with 100.
The index’s mathematical weighting means that every item or group is reflected in its relative importance to consumers. Below is a table that shows how CPI reports have ranked certain categories.
Source: Bureau of Labor Statistics. CPI report for October 2022
What is CPI?
CPI is closely monitored as an economic indicator to gauge inflation. However, that is not the only function of the CPI.
Private employers might use the CPI for determining how much they should pay their workers. The index is also used by the federal government to reset eligibility levels for federal tax brackets, cost-of living increases and government assistance programs. The Social Security Administration, for example, announced the largest cost-of living increase in 40 years in October. The CPI is the basis of the annual adjustment by SSA.
Anyone can also use the index to determine buying power by adding historical values to compare them to today’s dollars. According to the U.S. Census Bureau, the median household income in 1972 was $11,120. Inflation aside, this income was equivalent to $80,630 today’s dollars according to the CPI inflation calculator at the BLS website.
Next CPI Report
Each month, the BLS publishes a new CPI report that shows how the index has changed over the preceding month. December 13th will see the release of the next CPI report. It will show how average prices have changed since November.