The consumer price index (CPI) tracks the rate of change in the U.S. inflation over time, and is an important economic metric. As Kavan Choksi Business Consultant mentions, the CPI is based on prices paid by the consumers for goods and services throughout the U.S. economy. The percentage change in CPI over a span of time is referred to as the inflation rate.
Kavan Choksi Business Consultant talks about the United States consumer price index (CPI)
A monthly CPI report is released by the U.S. Bureau of Labor Statistics (BLS). This report includes the data about how the prices of varied goods and services changed over the last month and the last 12-month period. Apart from the headline data, the report also features “core CPI” inflation, which is a measure offering a more stable reading on inflation as it strips out energy and food prices from the calculation. Prices of such goods often experience unpredictable and sizable changes from one month to the other that have little to do with consumer demand.
CPI is calculated by tracking the change in the prices of a fixed basket of goods and services. There are a variety of sources that the BLS refers to in order to calculate CPI. They take into account the prices of goods and services from about 23,000 retail and service establishments throughout the United States. BLS also collects data from around fifty thousand landlords and tenants to determine the changes in the price of rent.
As Kavan Choksi Business Consultant points out, even though CPI figures may seem abstract to a layman, they essentially reflect the very real price changes that impact the daily spending of an American. CPI impacts the finances of people by:
- Measuring their purchasing power: CPI illustrates how much every dollar one earns can buy. When inflation drives up the prices, the purchasing power of money goes down. This means that a person would get to buy fewer goods and services than they did previously with the same amount of money.
- Guiding economic policy: In the simplest terms, CPI is an economic indicator used to determine the impact of government economic policy. Even though the Federal Reserve prefers the personal consumption expenditures price index (PCE) as the measure of inflation, it also pays attention to CPI.
- Determining government benefits: The CPI inflation rate is typically used by the federal government to adjust payments from multiple important programs like public school lunches, food stamps and Social Security (COLA). The CPI is also used for adjusting income eligibility levels to take part in social programs.
- Driving salary increases at work: Private companies may take a look at CPI inflation when trying to determine how much to increase employee salary or wages every year. This data can be a reliable metric for keeping prices and wages in line with competitors.
The monthly CPI report includes inflation rates for various goods and services, along with the rate of inflation in various regions across the United States. Popular items regularly purchased by Americans are included in the basket of goods and services used for CPI. The value of these items tends to be proportional to how they are sold. The current cost of the basket is compared to its cost in the year before, and subsequently multiplied by 100 to determine the percentage.
