What Is the Consumer Price Index (CPI)?

What Is the Consumer Price Index (CPI)?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

The Consumer Price Index (CPI) is a measure that assesses the averaged pricing changes in a basket of consumer goods and services such as transportation, food, and medical care. The CPI is calculated by taking price fluctuations for each item in the predetermined item basket and then taking an average. These items are weighted in accordance to their significance. This way, the CPI serves as a useful tool to gauge the cost-of-living and is one of the most frequently used figures for identifying periods of inflation or deflation.

Related Questions

1. How is the Consumer Price Index used?

The CPI serves a significant role in the economic universe. Economists and businesses use it to monitor trends in inflation and deflation. The government also uses it to adjust social security benefits.

2. What are the limitations of CPI?

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Despite its use, CPI has its limitations. It doesn’t take into account product substitutions made by consumers when products increase in price, it doesn’t consider shifts to new technologies, and it doesn’t account for regional variations in prices.

3. How frequently is the CPI updated?

The Bureau of Labor Statistics releases CPI data monthly. This regular updating helps provide the most accurate reflection of the cost of living possible, considering the ongoing fluctuations in prices.

4. What’s the difference between CPI and GDP deflator?

While both are measures of inflation, the GDP deflator measures the price changes of all goods produced, whereas CPI considers the price changes in goods and services typically consumed by households.

5. Is a high CPI good or bad?

A high CPI indicates a period of inflation, which isn’t necessarily bad or good; it depends on the overall economic context. Inflation can hurt spending power, but may also stimulate economic growth by encouraging spending and investment.