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 becomes irrelevant.
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 The basket can easily become outdated.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—namely, 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. Some resources you can use include:
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 there are significant differences between the two. For example, the consumer price index does not consider other factors that may affect consumer spending, including health, safety, crime, and water quality.
How Inflation Changes 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.