Consumer Price Index

The Consumer Price Index (CPI) is a measure of the aggregate price level in an economy. It comprises of a bundle of commonly purchased goods and services. As Kavan Choksi mentions, the CPI measures the changes in the purchasing power of a country’s currency, as well as the price level of a basket of goods and services. It is generally computed on a monthly or quarterly basis.

Kavan Choksi sheds light on the Consumer Price Index or CPI

The majority of CPI index series use 1982-84 as the basis for comparison. The U.S. Bureau of Labor Statistics (BLS) set the index level during the 1982-84 period at 100. An index of 110 implies that there has been a 10% rise in the price of the market basket compared to the reference period. In a similar manner, an index of 90 indicates a 10% reduction in the price of the market basket compared to the reference period.

In the United States, CPI reflects the buying habits of each of two population groups. The first group consists of the residents of urban or metropolitan areas, and includes professionals and self-employed, unemployed, poor, and retired persons (CPI-U). The second group includes urban wage earners and clerical workers (CPI-W). The all-urban group represents around 89% of the U.S. population. On the other hand, CPI-W’s population represents about 28 % of the total U.S. population, and is part of the CPI-U.

The traditional Consumer Price Index for All Urban Consumers (CPI-U) and the newer Chained Consumer Price Index for All Urban Consumers (C-CPI-U) are used to measure the price-change experience of the all-urban consumer group. The C-CPI-U more closely represents a cost-of-living index of the two, as it makes adjustments for consumers’ substitutions among expenditure items in reaction to relative price changes.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is largely based on the expenses of households that are included in the CPI-U. These households are the ones who get more than half their income from clerical work and have at least one earner who has been employed at least 37 weeks during the previous 12 months.

The CPI is broadly used as an economic gauge and a deflator of other economic series. Some specific examples of the uses of CPI include:

  • Relevant to the topic of poverty, the Census Bureau uses the CPI to adjust the official poverty threshold, or minimum income needed to avoid being poor, for inflation every year.
  • Employers of more than 2 million workers who are covered by collective bargaining agreements that tie wages to the CPI use the index to adjust their wages.
  • The Social Security Administration uses CPI-W to adjust benefits paid to Social Security beneficiaries annually and Supplemental Security Income (SSI) recipients.

As Kavan Choksi mentions, the BLS introduced a new estimation system for the Consumer Price Index in February 2015. It was the first major improvement associated with CPI in more than 25 years. The new system has improved flexibility and review capabilities. Based on the redesign process, a few minor changes in methodology were introduced, many of which impact the imputation of price changes.

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