Consumer Price Index (CPI)

Definition

The term consumer price index refers to a benchmark that measures a change in the price of goods and services purchased for consumption by households. The consumer price index also includes fees such as water and sewer as well as sales tax.

Explanation

A price index is a benchmark measure that allows analysts to understand how the price of goods and / or services varies over time or between geographies. Broad based indices allow economists to understand how well an economy is performing and the impact of prices on the cost of living.

Also known as the CPI, the consumer price index measures the change in prices for goods and services consumed by urban households. The metric includes typical user fees such as sewer and water in addition to sales tax. The index does not include investments in stocks and bonds as well as income taxes. The index is subdivided into two additional measures. The CPI-U covers 94% of the urban population, while the CPI-W covers 28% of the population, focusing on hourly wage earners and clerical jobs.

Goods and services price data is collected from 75 urban areas throughout the United States as well as nearly 25,000 retail establishments. Around 50,000 landlords supply rent information to the study. Prices are captured throughout the month, while the data is published on a monthly basis.

The CPI is one of the most popular measures of inflation and the effectiveness of monetary policy. It's also used to adjust income payments. For example, the CPI is used by public institutions to adjust the benefits of Social Security recipients as well as families receiving food stamps. In the private sector, it's used as a benchmark for rent increases, child support payments, as well as wage increases to collective bargaining unit employees.

Related Terms

producer price indexprice indexInternational Comparison Programimport and export price indexGDP deflatoremployment cost index