The Consumer Price Index (CPI) tracks how prices change each month for U.S. consumers. The Bureau of Labor Statistics (BLS) figures out the CPI by averaging the prices of a selection of goods and services that reflect overall U.S. consumer spending.
The CPI is a well-known way to measure inflation and deflation. It uses a different method for surveys, price samples, and index weights compared to the producer price index (PPI), which looks at price changes for goods and services from U.S. producers.
Learn more about CPI
The BLS gathers around 80,000 prices each month from about 23,000 retail and service locations. While both CPI indexes use the term urban, the more comprehensive and commonly referenced one includes 93% of the U.S. population.
Shelter category prices make up one-third of the total CPI. They are determined by a survey of rental prices from 50,000 housing units, which helps calculate changes in rental prices and the equivalent costs for homeowners.
The owners’ equivalent category shows the rent value for homes that people own, helping to show how much housing costs affect consumer spending. It includes user fees and sales or excise taxes, but it does not count income taxes or the prices of investments like stocks, bonds, or life insurance in the CPI.
The CPI indexes are calculated using data that considers how consumers change their spending when some products become more expensive. It also takes into account changes in the quality and features of products. The importance of different product and service categories in the CPI reflects current consumer spending habits from a different survey.
The Types of Consumer Price Index
Each month, the BLS releases two indexes. The Consumer Price Index for All Urban Consumers (CPI-U) covers 93% of the U.S. population who do not live in remote rural areas. It excludes spending by those in farm households, institutions, or military bases. CPI-U is the foundation for the important Consumer Price Index figures that financial markets pay attention to.
The BLS releases the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index represents 29% of the U.S. population who mainly earn income from clerical jobs or hourly wage positions.
CPI-W helps change Social Security payments and other federal benefits to match the cost of living. It also adjusts federal income tax brackets so that people don’t pay a higher tax rate because of inflation.
CPI Formulas
The usual CPI-U calculation has two main formulas. The first one finds the current cost of a weighted average basket of goods, and the second one looks at the change from one year to the next.
Annual CPI =(Value of Basket in Prior Year/Value of Basket in Current Year)×100Inflation Rate = (Prior CPI/New CPI−Prior CPI)×100Consumer Price Index Categories
The table below shows how the Consumer Price Index basket is divided among food, energy, and other items.
| Group | Weight |
| Food | 13.4% |
| Energy | 7.0% |
| All Items Less Food & Energy | 79.6% |
| Total | 100% |
Conclusion
The Consumer Price Index is a key economic indicator. It tracks how prices change for a set group of goods and services that consumers buy over time. The Bureau of Labor Statistics calculates and releases this index every month. It is widely used to measure inflation and shows how the economy is doing. Additionally, it helps adjust some income payments, like Social Security and pensions for federal retirees.