Consumer Price Index
The Consumer Price Index (CPI) is a measure of the average change in the prices paid by urban consumers for a fixed market basket of goods and services. The CPI is a market basket of things purchased by consumers in nonrural areas. Every decade or so the U.S. Department of Labor surveys consumers to find out how they spend their money. They find out what they buy and what share of their incomes they spend on each item. This becomes the base period. This monthly CPI is calculated by finding out the cost of the market basket and the index is created by comparing the current cost to the base period cost. The CPI is calculated monthly for two population groups, one consisting only of urban households whose primary source of income is derived from the employment of wage earners and clerical workers (CPI-W). This index represents the buying habits of 32% of the noninstitutional population.
As new uses were developed for the CPI in recent years, the need for a broader and more representative index became apparent. The all-urban consumer index (CPI-U), introduced in 1978, is representative of the 1982-84 buying habits on about 80% of the noninstitutional population, and includes wage earners and clerical workers, salaried workers, the self-employed, retirees, and the unemployed.
The CPI is not a cost of living inflation index because it measures changes in the price of things that people bought in the past. Because consumers change what they buy over time, increases or decreases in the CPI do not measure changes in the cost of living. A cost of living index would measure changes in the price of what people actually buy. [This means that CPI does not reflect what consumers actually purchase such as buying more chicken and pork instead of beef, or more hamburger than steaks and roasts.]
* Note: The Bureau of Labor Statistics has begun using a new formula for calculating the basic components of the CPI-U and the CPI-W effective with the data starting January 1999. For more information, go to the Bureau of Labor Statistics CPI home page at http://www.bls.gov/cpi/.
** Source Montana DOL Research and Analysis Bureau: http://www.ourfactsyourfuture.org/?PAGEID=67&SUBID=161
For more information about how the CPI is calculated and often used, please go to: https://www.bls.gov/cpi/home.htm
Informational Publication: What is Inflation and Why Do We Care?: http://lmi.mt.gov/Portals/135/Publications/LMI-Pubs/Articles/2017/0417-WhatisInflationAndWhyDoWeCare.pdf