The Consumer Price Index, or CPI, measures how the price of a weighted “basket” of commonly-purchased goods changes over time. The CPI is the most commonly used measure  for determining monthly and annual inflation (or deflation) levels.

Consumer Price Index, explained

The Consumer Price Index is a weighted average used by the Bureau of Labor Statistics (BLS) to measure price changes over time.

The Index relies on the price of a “basket” of common consumer goods and services. To calculate the index, prices are added together, averaged and then weighted according to their importance in consumer budgets.

What’s in the basket?

Goods and services used in the CPI are determined based on data provided by consumers and retailers in nearly 90 urban areas. Current categories (and their most recent weights) include:

• Housing: 32.5%
• Commodities: 21.3%
• Food: 13.6%
• Energy: 8.2%
• Healthcare: 6.9%
• Transportation: 5.9%
• Education: 5.3%
• Other expenses: 6.3%

Types of CPIs

The BLS publishes two CPIs each month:

• The Consumer Price Index for All Urban Consumers (CPI-U) covers consumers outside remote rural areas, farms, institutions and military bases. CPI-U provides the basis for many CPIs that financial markets rely on. 
• The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) covers households with income primarily sourced from hourly wage jobs and clerical work. CPI-W is used to adjust pension, federal benefits and federal income tax brackets for inflation. 

Additionally, the BLS releases multiple versions of the same CPI. For instance, some include fuel and food prices, while others exclude these more volatile items. The BLS also offers regional and local CPI numbers, as well as seasonal adjustments.

How does the Consumer Price Index affect you?

The Consumer Price Index has many applications, including:

• As an economic indicator. The CPI is the most widely-used measure of inflation, since it provides a standardized measurement for price changes. 
• Policy formulation. The President, Congress and Federal Reserve all rely on CPI trends to inform fiscal and monetary policies.
• Deflating dollar values. The CPI and its components are used to adjust items like retail sales, wages and even the value of a dollar.
• Cost of living adjustments. The CPI is used to adjust private and federal wages, Social Security, income tax brackets and eligibility for government assistance. 

As such, the CPI impacts consumers and investors alike. For example, the Fed often uses the CPI to inform monetary policies, which affects economic growth and consumer and business spending and profits. From there, these changes can bleed into your investment portfolio to produce short- and long-term effects.

What this means for you

The Consumer Price Index is an essential economic metric for investors and consumers alike. You’ve likely felt its importance before: namely, when your investors benefit or suffer thanks to inflation.

Fortunately, Q.ai offers a quick and easy way to capitalize on CPI changes with our Inflation Kit. While we can’t take the sting out at the grocery store, we can help find long-term success, regardless of how the CPI moves this month.