The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by consumers for a representative basket of consumer goods and services. The CPI measures inflation as experienced by consumers in their day-to-day living expenses. The CPI is used to adjust income eligibility levels for government assistance, federal tax brackets, federally mandated cost of living increases, private sector wage and salary increases, and consumer and commercial rent escalations. Consequently, the CPI directly affects hundreds of millions of Americans.
The Bureau of Labor Statistics publishes four consumer price series each month:
The CPI-U, which began publication in January 1978, represents the buying habits of the residents of urban or metropolitan areas in the United States and covers over 90 percent of the U.S. population. The CPI-U is the headline CPI number and is the one most commonly referred to in the news. Not seasonally adjusted data for this series is available back to 1913.
The CPI-W, the oldest of the series, is computed using the same prices as the CPI-U, but the weights of the CPI-W are based on a subset of the CPI-U population. This subset covers approximately 30 percent of the U.S. population.
The CPI-W population includes households where more than one-half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. This information is obtained from the Consumer Expenditure Survey Interview Questionnaire. Thus, the CPI-W population excludes households of professional and salaried workers, part-time workers, the self-employed, and the unemployed, along with households with no one in the labor force, such as those of retirees. Not seasonally adjusted data for this series is available back to 1913.
The C-CPI-U also represents the urban population as a whole, but uses a different formula and different weights to combine basic (or lower level) indexes. The formula used in the C-CPI-U accounts for changes in consumer spending behavior by using weights based on expenditures from both a base period and a current period. This formula requires consumer spending data that are not immediately available; therefore, the C-CPI-U, unlike the other two series, is published first in preliminary form and is subject to three quarterly revisions. BLS began publishing this series in August 2002, with data beginning in January 2000.
For some food, beverage, and energy items, the CPI publishes average price data. A list of what is covered in the published average price series is shown in appendix 6.
Item (a good or service in the market basket) and area (section of the United States) indexes use only a portion of the CPI sample; this makes them subject to substantially greater sampling error than the national CPI. The primary reason for publishing indexes at the item level is to aid in the analysis of movements in the national all items index. Decisions on which detailed indexes to publish depend, in part, on the reliability of their estimates.
BLS classifies the CPI market basket of consumer goods and services into a hierarchy of categories that are also published monthly. The top levels of the item category hierarchy consist of the following:
BLS also publishes indexes for special aggregations, such as energy items, that cut across the preceding classification scheme. Some users consider the series all items less food and energy to measure the core rate of inflation. Food and energy are two of the most volatile components of the CPI, so many analysts regard the measure of core inflation as more useful for their purposes. We publish all levels down to item strata at the U.S. level and less item detail for the area indexes.
Along with the U.S.-level data, we calculate and publish indexes (appendix 7, index publication level) for the following areas on a monthly or bi-monthly basis: Detailed food, energy, and shelter indexes are published monthly.
For a detailed list of items that are published monthly according to these areas, see appendix 7.
Each month’s index value displays the average change in the prices of consumer goods and services since a base period, which is currently 1982–84 for most indexes. For example, the CPI-U for April 2017 was 244.524. You can interpretthis as a representative set of consumer goods and services that cost $100 in 1982–84 would have cost $244.52 in April 2017.
Rather than emphasizing the level of the index in comparison to the base period, the monthly CPI release stresses the CPI’s percent change from the previous month and from the previous year. The most commonly reported monthly percent changes are the 1-month seasonally adjusted percent change, and the 12-month not seasonally adjusted percent change.
The CPI, unlike many other statistical series, does not rely on respondents to send data to the BLS national office; CPI data collectors collect almost all of the data for the CPI-U and CPI-W. Virtually all data are received in time for the calculation of indexes for the appropriate month, so routine revisions to account for late-arriving data are not necessary. The CPI-U and CPI-W are commonly used in escalation agreements and to adjust pensions and tax brackets; consequently, revisions can be costly for the users of these indexes so these series are final when issued. Additional information on escalation contracts is available in the How to Use the Consumer Price Index for Escalation factsheet. In the rare case when BLS discovers that an error was made while collecting or compiling information, we issue a correction to the affected series in accordance with BLS policies.
As previously noted, C-CPI-U indexes are not final when first issued; they are subject to three quarterly revisions. The data are final after the last revision, which occurs 10–12 months after the initial publication. If the CPI-U and CPI-W series are corrected, the C-CPI-U series is corrected as well for all series affected by the error, as far back as the previous 5 years.
Seasonal adjustment is a statistical procedure that adjusts for normal seasonal variations to help decisionmakers better understand underlying economic changes (e.g., gas prices that typically rise each summer). Each year, with the release of January data, seasonal adjustment factors are recalculated to reflect price movements from the previous calendar year. This routine recalculation will result in revisions to seasonally adjusted indexes for the previous 5 years. Additional information on seasonal adjustment is available on the seasonal adjustment webpage.
The CPI affects virtually all Americans because of the many ways in which it is used. Its major uses include the following.
As the most widely used measure of retail inflation, the CPI is a major indicator of the effectiveness of government economic policy. The President, Congress, and the Federal Reserve Board use the movement of the CPI to help formulate and monitor the effects of fiscal and monetary policy. Business executives, labor leaders, and other private citizens also use the index as a guide in making economic decisions.
The index directly affects the income of almost 80 million people. Social Security benefits as well as military and Federal Civil Service pension payments are indexed to the CPI. In the private sector, many collective bargaining agreements tie automatic wage increases to the CPI and some private firms and individuals use the index to keep rents, alimony, and child support payments in line with changing prices.
Federal (and some state) income tax bracket thresholds and other parameters are adjusted to the CPI. Additional information about this process is available on the Internal Revenue Service website.
Other statistical programs use the CPI or its components to adjust for price changes to produce inflation-free versions of their series. Examples of CPI-adjusted series include components of the U.S. Department of Commerce’s National Income and Product Accounts (such as gross domestic product and personal consumption expenditures), retail sales measures, and the BLS hourly and weekly earnings series.