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.
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...]