What Is the Consumer Price Index (CPI)?

The index measures the change in average price paid by consumers for a set of goods and services that represent regular expenses, like groceries or gas.
Taryn Phaneuf
By Taryn Phaneuf 
Updated
Edited by Laura McMullen

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Updated Feb. 13, 2024, to add most recent CPI figures.

  • Current index: The consumer price index, or CPI, rose 0.3% in January after increasing 0.2% in December. The year-over-year increase was 3.1%.

The CPI measures the change in prices paid by U.S. consumers for everyday goods and services, like groceries, gas and rent. It’s calculated by the U.S. Bureau of Labor Statistics and tracks real-world impacts of inflation on consumers. Every month, the BLS releases updated CPI data, showing monthly and annual changes in average prices.

The most recent CPI report, released on Feb. 13, showed the index increased by 0.3% between December and January, and grew by 3.1% over the past 12 months

U.S. Bureau of Labor Statistics. Consumer Price Index — December 2023. Accessed Feb 13, 2024.
.

The current CPI report also found:

  • The cost of shelter rose 0.6% in January and was, again, a major contributor to the rise in CPI this month. The shelter index is up 6% from the same time a year ago.

  • Lower gas prices contributed to a 0.5% decline in the energy index in January. Over the past year, the energy index decreased 4.6%.

  • Food prices rose 0.4% between December and January. Prices for groceries (+0.4%) and restaurants (+0.5%) were both higher.

  • Core CPI — that is, all items less food and energy — rose 0.4% over the last month and 3.9% over the past 12 months.

Typically, Americans can expect the CPI to increase between about 1% and 4% each year, based on data from the last couple of decades.

During the pandemic, the annual inflation rate stayed below 4% until April 2021. That month, the CPI increased 4.2% over the previous year and continued to rise until it appeared to peak in June 2022, when the year-over-year increase was reported at 9.1%. The annual inflation rate stayed above 4% until May 2023.

CPI vs. PPI

The producer price index, or PPI, also is a measure of inflation calculated by the BLS. However, the PPI focuses on the change in prices from the seller’s point of view, taking into account how much sellers pay producers for their goods.

This index tracks average price changes for domestically produced goods, services and construction

U.S. Bureau of Labor Statistics. Producer Price Indexes — December 2023. Accessed Feb 13, 2024.
.

CPI vs. PPE

Like the CPI, the personal consumption expenditures, or PCE, is a price index that measures changes in how much consumers pay for goods and services

Bureau of Economic Analysis. Prices & Inflation. Accessed Feb 13, 2024.
. However, the PCE price index is calculated by a separate federal agency called the Bureau of Economic Analysis.

The BEA uses a different formula to calculate inflation (and deflation, when prices decrease) and weighs categories of goods and services differently

.

The two indexes also have different scopes. Unlike the CPI, the PCE includes spending done on behalf of consumers.

One common example is medical spending. The CPI takes into account only what a household spends out of pocket on medical care. The PCE price index records that spending as well and adds what employers or government programs pay on consumers’ behalf through insurance plans.

Because the PCE and CPI differ in their formula, weighting, scope and other effects, their results are different. The Federal Reserve prefers to use the PCE price index to measure inflation. This comes into play when the Fed makes monetary policy decisions, such as whether to raise the federal funds rate.

How is CPI calculated?

To calculate the CPI, the bureau collects more than 80,000 prices per month from sellers and retailers in 75 urban areas. The price data captures the spending patterns of various populations.

The most commonly cited version of the index is the Consumer Price Index for All Urban Consumers (CPI-U), which shows the change in prices for the average household living in U.S. cities. The CPI-U represents more than 90% of U.S. consumers, making it the most broadly applicable.

The BLS groups goods and services into categories, such as food, shelter, energy and medical care services. Average prices for each item are aggregated and used to calculate the CPI with complex statistics. Everything included in the index is mathematically weighted so that each item or category’s effect on the index reflects its relative importance to consumers. The table below shows the relative importance assigned to some categories in the most recent CPI report.

Group

Relative importance in CPI

Shelter

36.19%

Food

13.56%

Energy (fuel, utilities)

6.66%

Medical care services

6.52%

Transportation services (insurance, airfare, etc.)

6.29%

New vehicles

3.68%

Source: Bureau of Labor Statistics

U.S. Bureau of Labor Statistics. Relative Importance of Components in the Consumer Price Indexes. Accessed Feb 13, 2024.

As an index, the CPI shows where current average prices for a particular basket of goods and services land on a scale relative to a historic reference point. But it’s more common to talk about the CPI’s inflation rate, which illustrates how much prices have increased between two points in time (or decreased, in the event of deflation).

That rate is calculated by determining the current index value of the basket of goods and services, then dividing it by the value of those same goods and services from a year or month prior. The result is then multiplied by 100.

Typically, you’ll see the inflation rate reported for all items included in the CPI. But it's also common to see it reported without energy or food price changes, because those categories tend to be more volatile. This version of the index is known as “core inflation.”

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How is CPI used?

The CPI is closely watched as an economic indicator to measure inflation. But that’s not its only purpose.

Private employers may use the CPI to determine how much to pay workers. The federal government also uses the index to reset eligibility levels for government assistance programs, federal tax brackets and cost-of-living increases

U.S. Bureau of Labor Statistics. Handbook of Methods: Consumer Price Index. Accessed Feb 13, 2024.
. For example, the Social Security Administration announced in October the biggest cost-of-living increase in 40 years. SSA bases its annual adjustment on the CPI.

Additionally, anyone can use the index to calculate buying power by adjusting historical values to see how they stack up in today’s dollars. For example, in 1972, median household income was $11,120, according to the U.S. Census Bureau. Factoring in inflation, that income had the same buying power as $82,993 in today’s dollars, according to the CPI inflation calculator on the BLS website.

Next CPI report

The next CPI report will be released March 12

U.S. Bureau of Labor Statistics. Schedule of Releases for the Consumer Price Index. Accessed Feb 13, 2024.
. It will detail how average prices changed in February.

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