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What is the Difference between Inflation and the Consumer Price Index?

Many people are confused by the difference between Inflation and the Consumer Price Index. The Consumer Price Index is as its name implies an index, or “a number used to measure change”.

The Consumer Price Index (CPI-U)

The government chose an arbitrary date to be the base year and set that equal to 100. Currently that date is 1984. (Or more accurately the average of the years 1982-1984) previously the base year was 1967. 

Every month the Bureau of Labor Statistics (BLS) surveys prices around the country for a basket of products and publishes the results as a number. Let us assume for the sake of simplicity that the basket consists of one item and that one item cost $1.00 in 1984. Then the BLS published the index in 1984 at 100. If today that same item costs $1.85 the index would stand at 185.0 of course a group of items would work the same way. If you have 100 items each would account for 1% of the total index.

By itself that does not tell us what the current Inflation rate is. We must do some calculations using that index to tell us the Percentage of increase or decrease in the level of prices.

What is Inflation / Deflation?

“Price Inflation” is the percentage increase in the price of the basket of products over a specific period of time. 

“Price Deflation” is, of course, the percentage decrease in the price of the basket of products over a specific period of time.

For convenience Price Inflation has been shortened in common usage to simply “Inflation” and similarly Price Deflation has been shortened to “Deflation”.
(*Interestingly this is not Webster's definition of Inflation... More)

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