What Is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI), which measures the change in prices paid monthly by U.S. customers, is calculated using a data component and a weighted average of prices for ‘baskets of goods and services. Bureau of Labor Statistics estimates Consumer Price Index using an average of the costs of a basket of products and services that represents aggregate U.S. consumers’ spending.

The Consumer Price Index report is one of the most popular measures for deflation and inflation. The Consumer Price Index report is based on a different survey method, sample prices, and index weights from the Producer Price Index (PPI) which measures changes in prices received by U.S. goods and services producers.

Consumer Price Indexes: Types

The BLS releases two indexes every month. The Consumer Price Index for All Urban Consumers is a measure of 93% of U.S. residents who do not live in remote rural areas. The CPI-U does not include the spending of people who live on farms, institutions, or military bases. CPI-U forms the basis for the widely reported Consumer Price Index figures that are important to financial markets.

BLS publishes Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI covers 29% of U.S. households that have incomes derived primarily from clerical jobs or hourly wages.

CPI-W adjusts Social Security and other federal benefits, including pensions, to reflect changes in the cost of living. The CPI-W also adjusts federal income tax rates to make sure that taxpayers don’t face a higher rate of marginal income due to inflation.

How is the Consumer Price Index used?

CPI is used widely by financial market players to gauge inflation and by the Federal Reserve for calibrating its monetary policies. CPI is also used by businesses and consumers to make informed decisions about the economy. CPI is used to negotiate pay because it measures changes in consumer purchasing power.

Federal Reserve

CPI data is used by the Fed to determine its economic policy. The Fed uses Consumer Price Index data to determine economic policy. With a target of 2% inflation, it can either implement an expansionary monetary strategy to stimulate the market if growth slows, or a contractionary policy if prices (and the economy) are growing too rapidly. The Fed adjusts its Fed Funds rate in response to inflation rates higher than desired.

Other Government Agencies

The Cost-of-Living Adjustments (COLAs), based upon the Consumer Price Index, affect federal payments made to approximately 70 million Americans who receive Social Security and SSI (Supplemental Security Income). These adjustments also affect federal pension payments and school lunch subsidies.


The rates of mortgages and other long-term loans are frequently influenced by the rates set by government agencies. Rates often rise as the CPI increases, and government policy changes are made to reduce inflation. CPI data can be used by landlords to determine the annual rent increase for tenants.

Financial Markets

The financial market is driven by many factors. CPI is one of these factors since Fed policies have a direct impact on economic growth, profits for corporations, and the ability to spend on consumers.

A higher CPI is often a sign of a more relaxed government policy. It means that people can borrow money at a lower cost and have a greater capacity to spend. A CPI that is decreasing or lower may mean that the government will ease policies that help boost the economy.

The Labor Market

CPI reports can be used by employees to ask for a raise based on nationwide increases in labor rates and pricing. CPI reports can be used by employees to ask for a pay raise when they are based on national increases in both labor rates and pricing. 3

Remember that CPI data is based on national data. Employees may find it easier to understand their situation by using local data. Some workers who are covered by collective agreements could also have their wages linked to changes in CPI.