The Consumer Price Index or CPI of a country is meant to track the prices of everyday goods and services purchased by its households. As Kavan Choksi says, CPI covers a large number of aspects, like food, clothing, transport and leisure spending. Economists typically average out price changes across a basket of such goods to work out how prices are rising or falling and how this impacts the cost of living. The U.S. Department of Labor, Bureau of Labor Statistics produce the CPI to represent a statistical estimate of inflation, which refers to a general increase in prices and a decrease in the purchasing value of money.
Kavan Choksi underlines the different types of CPI
The Consumer Price Index is one of the most extensively used tools for measuring inflation and deflation. Inflation is an extremely important indicator of the health of an economy. Central banks and governments often use CPI and other indices to make economic decisions as well. When most analysts discuss the “CPI”, they usually imply to the CPI for all urban consumers (CPI-U). However, there are other types of CPI as well. These other versions of CPI tend to capture varied pricing trends, based on the re-weighting of the basket of goods and services.
Two main types of CPIs are published by the U.S. Department of Labor, Bureau of Labor Statistics each month:
- The Consumer Price Index for All Urban Consumers (CPI-U): This covers almost 93% of the population of the United States, including the ones living in farm households, rural areas, institutions, or on military bases. It is the most commonly cited index when referring to changes in consumer prices.
- The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W): This covers almost 29% of the population of the United States. This index is typically used for adjusting Social Security payments and other federal benefits. It can also be used for shifting federal income tax brackets with the aim of preventing bracket creep due to inflation.
There are certain price indexes calculated using prices from the base CPI-U, like:
- Chained Consumer Price Index for all urban consumers (C-CPI-U): Commonly referred to as the chained CPI, this index uses more up-to-date weightings for the price data and models consumer spending behaviour in response to price changes.
- Consumer Price Index for Americans 62 years of age and older (R-CPI-E): This index re-weights prices from the CPI-U data for tracking the spending for households with at least one consumer who is 62 years old or older.
- Core CPI: This measure of inflation begins with the CPI-U and then strips out the prices of food and energy due to their volatile nature. The goal of Core CPI is to eliminate certain “noisy” data and get a clear look at the underlying inflation trends.
As Kavan Choksi says, the U.S. Department of Labor, Bureau of Labor Statistics may slice and dice the data by various factors, like geography or a specific subset of price data. The Personal Consumption Expenditures (PCE) index is another commonly used indicator of monthly inflation. This index tends to be tracked and managed by the U.S. Bureau of Economic Analysis (BEA).
