The consumer price index is a measurement of changes in the prices of a fixed "basket of goods and services” which are commonly purchased by households. Each year, the goods' current prices are compared with what their prices were during a certain base year and the difference is used to compute the index. When the basket of goods used for the reference year is no longer suitable because of changes in consumption patterns, the index updates the products and services it includes in the index.

A lot of factors can change the consumer basket of goods are services. Among these are fashion, technology, and consumer taste. The basket can easily become outdated. Thus, it is critical to update the index by using a reference year that reflects the consumption pattern of the period in question.

Here are some websites that explain the consumer price index:

The Bureau of Labor Statistics, part of the U.S. Department of Labor, studies the consumer price index every month. Expenditures have 200 classifications, and they're arranged into eight categories, or "grounds" (medical care, food, etc.). The percentage of change reflected in the prices of these items provides a measurement of inflation. The index shows the consumption patterns of several population groups including the all-urban consumers and the urban wage earners or clerical workers. The all-urban group represents around 87 percent of the U.S. population.

The Bureau of Labor Statistics website contains more information about the consumer price index and how it is calculated. There are several web calculators that enable you to measure and forecast the index including West Egg and

In essence, the consumer price index is used in economic studies as an economic indicator and as a basis for adjusting the currency. Sometimes the index is called the cost-of-living index—but it is important to note that the consumer price index and the cost of living index are two separate and different indexes.

How Inflation Changes the Consumer Price Index

  • Shadow Government Statistics: A government economic report relating to the index.
  • BLS: Concurrent changes in the index as a measure of inflation.
  • You can choose the variables and calculate the consumer price index.

It is important to distinguish between the consumer price index and core inflation. The index's main objective is to reflect changes in living standards and the cost of living, based on a basket of commodities consumed by the average household. Meanwhile, core inflation is also a measurement of change, but it excludes particular items found in the index. Because of this, core inflation is considered a better measurement of underlying inflation, and hence a better indicator of future price changes. Many factors can influence core inflation, including the government's monetary policy and the amount of money relative to production in the economy.

Both the consumer price index and core inflation are important indicators of economic activity. Economists use these data to suggest regulations that will change the economy for the better.

About the Author

Adrian Ludwig is a senior account executive at Crest Capital, where he captures incremental online sales typically lost by standard vendor finance programs. Adrian works in nearly every industry vertical, providing leases and loans for equipment, vehicles, and software. Check out his most popular piece: The Difference Between Good Debt and Bad Debt.