Consumer Price Index Definition

What is the Consumer Price Index?

The Consumer Price Index is simply a basket of goods that is used by the Bureau of Labor Statistics to gauge how much price inflation the economy is experiencing. It is “weighted” based on how much of each good the average family uses. Therefore if  41% of your expenses are related to the housing category and 3.6% of your expenses are related to the apparel category and Apparel goes down by 1% and housing goes up by 1% your overall expenses will still be going up. In other words, if you spend $820 on rent a month and $72 on clothes a 1% increase in your rent would add $8.20 to your monthly rent expenses while a -1% would only save you $0.72 on clothes.

In today’s article Doug Short, editor of Advisor Perspectives looks at the makeup of the U.S. Consumer Price Index (CPI) and how much each category has increased since 2000. He also looks at Education costs and Energy and addresses the common misconception that the CPI doesn’t include Food and Energy (which it does). Food and beverages make up 15.3% of the CPI plus Energy is a major component in both the housing and transportation sections. Doug also addresses  “Core Inflation” which doesn’t include Food and Energy and what it is used for.  Doug also includes an interesting little tidbit about beverages that are included in core inflation that you wouldn’t expect. ~Tim McMahon, editor.

What Inflation Means to You: Inside the Consumer Price Index

By Doug Short
September 17, 2013

What does an increase in inflation mean specifically to your household?

Let’s do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I’ll refer to hereafter as the CPI.

Consumer Price Index Percentages

The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the [Read more...]

How Inflation Can Reduce Your Annuity Income (and what you can do about it)

Even though this is written from a UK perspective, it holds true for the rest of the world, too. ~ editor

Annuity Income and Inflation

Inflation as defined by Wikipedia is “an average index used to measure the rise in the general level of prices of goods and services in an economy over a period of time” which in layman’s terms means the average amount by which goods and services are increasing. Monetarism an as economic theory identifies keeping inflation low as the main goal in achieving sustained economic growth, as opposed to reducing unemployment. The reason for this is that whilst unemployment is a burden on the people without jobs, high inflation (it is argued) impacts the entire population, including all those who are employed. If wage inflation is stagnant or very low (as it is at present) then people’s living standards are reduced by higher prices. For those on fixed incomes, which often includes a high proportion of retired people, the problem is intensified because they have no means by which to raise their income in the future to mitigate against this.

[Read more...]

The Real Basket of Goods

I recently received the following from Ed Devol,

“When I try to educate people about the impact of inflation, I find putting it in terms of time worked for something is a good way of explaining inflation”.

 Thanks, Ed. I agree, when I am deciding whether to purchase something, I like to think of it in terms of how many hours I have to work to buy it. (It helps keep it “real”). In addition economists often link how many hours the average person has to work to eat. A poor country might require eight hours of work a day just to eat. While a rich country might require only 1 hour a day. So you might like the following article by Lynn Carpenter as she tracks prices and earnings over the last 60 years. And tells how many hours you have to work to buy a “weekend of food”. ~Tim McMahon, Editor

No Wonder They Called It Happy Days

By Lynn Carpenter

The best thing about investing… Well the money can be pretty nice… but the part I like most is how following an investment idea takes you into so many different worlds.

For instance, lately I was wondering how bad inflation really is… in a real-world historical sense. Which led to food costs, which led to grains and biofuels, which finally led to the $9 million giveaway. Shall we proceed?

The shocker in all this is the starting point… food costs. [Read more...]

Does the Consumer Price Index (CPI) Include Taxes?


I have heard over the years that the CPI does not include taxes as one of its components. In other words, an increase or decrease in a tax rate is not considered a change in consumer prices/costs. Is this true? If so, how is this omission justified?

Thank you,

James Schmidt

[Read more...]

Inflation vs Consumer Price Index – Do you know the difference?

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 (they change the base year every once in a while so you don’t notice that there has been over 2000% inflation since the start).  See Cumulative Inflation Since 1913.

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. [Read more...]

Bureau of Labor Statistics Changes CPI

The Bureau of Labor Statistics (BLS) made changes of  historical proportions this month by changing how the Consumer Price Index is reported.

For the first time in history  the BLS has begun reporting the Consumer Price Index to three decimal points. Their official statement is as follows:

“Effective with this release, index levels are now published to three decimal places. Percent changes based on these three-decimal place indexes will continue to be published to one decimal place. “

So for January 2007 the CPI-U index is now 202.416 rather than 202.4 but their official inflation rate is still 2.1% rather than the 2.08% that we calculate it out to.

While I applaud the higher level of accuracy on the index, I wonder why they decided to change it? Could it be that the index is now over 200 (indicating 100% inflation since 1982) and they feel the need for a bit more accuracy?

The interesting thing is that we have been using that index to calculate the inflation rate to two decimals for years but the BLS has decided not to switch their inflation calculation to two decimals but to switch the index to three decimals.

Or perhaps they have heard complaints like: is publishing to two decimal places so why can’t they? Perhaps, next year after having three digits on the index for a year they will go to two or three digits on the Inflation Rate in order to keep up with us.

In the mean time the only place to get two digit inflation rates is at