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Consumer Price Index (CPI) & Inflation

Updated: Aug. 24, 2022Written By: Marcia WendorfReviewed By:

The Consumer Price Index (CPI) provides a measure of aggregate price change for consumers in the United States, and similar indices are prepared in other countries. CPI is used to determine the rate of growth of consumer prices, better known as inflation.

Inflation Concept

Ibrahim Akcengiz/E+ via Getty Images

What Is the CPI?

Every month, the U.S. Bureau of Labor Statistics publishes its Consumer Price Index, or CPI, which measures changes in the prices paid by consumers for a representative basket of goods and services that reflects typical consumer buying patterns. Besides the U.S. as a whole, separate indexes are prepared for other countries and for various geographic areas within the U.S. For example, the primary inflation indicator in Canada is also called the Consumer Price Index, which is compiled by Statistics Canada.

CPI is the most widely used measure of inflation, which reflects a decline in consumer purchasing power as the prices of goods and services go up. Inflation is most often reported over a 1-year period, but can also be presented for monthly or quarterly periods.

Note: In March 2022, the Consumer Price Index increased by 8.5% year-over-year, and this is the largest increase in 40 years.

Bureau of Labor Statistics April 2022 Consumer Price Index graph

April 2022 Consumer Price Index (Bureau of Labor Statistics)

The graph above shows the rate of increase in the CPI for the entire U.S. over the past 20 years. The two areas in gray representing the Great Recession that began in 2008 and the small recession that occurred in 2020 as a result of the Covid pandemic.

The below BLS graph shows the increase in the CPI for separate regions of the country over a 20-year period. For those in the Mountain West, as an example, the rate of inflation exceeded 10% in April 2022.

Graph of the Bureau of Labor Statistics April 2022 Consumer Price Index by region

April 2022 Consumer Price Index by region (Bureau of Labor Statistics)

How Often CPI Is Updated

Every two years, the BLS updates the contents of the basket of goods and services that it tracks based on a survey of its data providers. If you're curious when the BLS will release its newest CPI, the BLS provides a schedule of its CPI release dates.


The U.S. Bureau of Labor Statistics also publishes the Producer Price Index (PPI), which is a measure of producer prices within the U.S. economy. The PPI reflects prices changes on a wholesale level, while the CPI reflects price changes on a consumer level.

What's in the Consumer Price Index?

In the United States, CPI is calculated using almost 100,000 prices that are collected from thousands of retail and service businesses, as well as the rental prices of 43,000 rental housing units. The rental data is extrapolated to include the costs incurred by homeowners and is used to calculate the cost of shelter and what percentage of total consumer spending goes to housing. In all, the prices of around 80,000 items are collected each month, including those of online outlets.

The BLS actually publishes two separate CPI indexes:

1. The Consumer Price Index for All Urban Consumers (CPI-U)

CPI-U covers 93% of the U.S. population, but excludes those living in rural areas, such as on farms or military bases. It is the more reported index and is the index on which changes in the principal of Treasury Inflation-Protected Securities, or TIPS, are based. During times of inflation, TIPS interest payments rise, and when a TIPS matures, investors are paid a higher principal.

2. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)

Participants in this index must meet two additional requirements: over one-half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the prior 12 months. Participants in the CPI-W population represent around 29 percent of the total U.S. population.

Basket of Goods & Services

The CPI market basket is derived from detailed reports provided by around 24,000 individuals and families on what they actually bought. The basket is comprised of several major categories, including food and beverages, housing, apparel, transportation, medical care, recreation, education, and communication. Categories are then further broken out; for example, food prepared at home is a separate category from food eaten outside the home, and the cost of gasoline is broken out from other energy expenses such as electricity, piped gas, and heating oil.

The BLS applies specific weights to each category to indicate that category's relative importance to the average consumer. For example, it gives food prepared at home a slightly higher weight than food eaten out.

While the CPI includes taxes such as sales and excise taxes, it excludes income tax and Social Security taxes. It also doesn't include investments such as stocks, bonds, real estate, and life insurance because they are more related to savings than to consumption expenses.

How to Calculate the Inflation Rate

The formula for calculating the rate of inflation is:

Rate of Inflation = ((C - P) / P) x 100

  • C = the current price of all goods and services sampled
  • P = the previous period's prices, while typical periods are a month or a year

How the CPI is Used

  • An economic indicator: The CPI is the most widely used measure of inflation and it influences decisions made by the government, business, labor, and individuals. The U.S. President, Congress, and the Federal Reserve Board use the CPI to formulate fiscal and monetary policies.
  • A deflator of other economic series: The CPI is used to translate price changes in other series, such as retail sales, and hourly and weekly earnings, into inflation-free dollars.
  • A way to adjust consumers' income payments: The CPI is used to adjust income eligibility levels for government assistance and to automatically provide cost-of-living wage adjustments for Social Security beneficiaries and military and Federal Civil Service retirees. The CPI is also used in determining the eligibility criteria for food stamp recipients and child lunch programs.
  • A way to adjust the Federal income tax structure: These adjustments prevent inflation-induced increases from raising individuals' income tax brackets.

Core CPI

The "Core CPI", or "Consumer Price Index for All Urban Consumers: All Items Less Food & Energy", is an aggregate of prices paid by urban consumers for a representative basket of goods and services, excluding energy and food. The core CPI is often used by economists rather than the CPI-U because the prices of food and energy are often volatile, and the core CPI allows them to focus on the "core" or "underlying" rate of inflation.

Importance of the Consumer Price Index

  • As a measure of inflation, the CPI is often viewed as an indicator of the effectiveness of current government economic policy.
  • The CPI is used to adjust Social Security benefit payments, and to determine income eligibility levels for government assistance.
  • It is used in assessing the eligibility criteria for millions of food stamp recipients, and children in school lunch programs.
  • It is the basis for cost-of-living wage adjustments for millions of American workers.
  • The CPI is used to adjust Federal income tax brackets, preventing inflation-induced increases in tax rates.
  • The Federal Reserve takes into consideration the CPI when making decisions for raising or lowering interest rates.
  • Many collective bargaining agreements tie wage increases to the CPI.
  • CPI may guide local authorities on setting maximum rental price increases.

Bottom Line

Knowing what the Consumer Price Index is and where you can access its information is useful for both investors and citizens in general. CPI data allows them to view past trends in spending habits and anticipate new ones, and by determining the current rate of inflation, or deflation, it allows individuals, including investors, to make more informed decisions.

This article was written by

Marcia Wendorf profile picture
Marcia is a former high school math teacher, technical writer, author, and programmer. She stays on top of worldwide news about science, government policies, finance, infrastructure, and medical issues. She is always "sniffing the wind" for the latest trends and directions, and keeping her readers abreast of these developments.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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