What Is the Consumer Price Index (CPI)?
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Updated April 10, 2024, to add the most recent CPI figures.
Current index: The consumer price index, or CPI, rose 0.4% in March after doing the same in February, according to the most recent report released April 10. The year-over-year increase was 3.5%.
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.
What happened to CPI in March?
The CPI increased by 0.4% between February and March — the same rate reported in the previous month. Over the past 12 months, the CPI increased 3.5%.
Core CPI — that is, all items less food and energy — rose 0.4% over the last month and 3.8% over the past 12 months.
The increase in March was driven mostly by higher housing and gas prices, according to the report.
Housing prices: The shelter index rose 0.4% in February and is up 5.7% from the same time a year ago.
Energy prices: The energy index increased 1.1% in March. Over the past year, the energy index increased 2.1%.
Food prices: The overall food index rose 0.1% in March and 2.2% over the past 12 months. Increases in the food index are driven by rising prices for dining out. Food away from home rose 0.3% in March and 4.2% over the past 12 months.
The latest CPI report shows prices also increased for motor vehicle insurance, medical care, apparel and personal care. However, prices decreased — a concept known as deflation — in some areas as well, including used cars and trucks, recreation, and new vehicles.
» MORE: Is rent going up?
Why does CPI matter?
The CPI is used as a proxy for inflation. Typically, Americans can expect the CPI to increase between about 1% and 4% each year, based on data from the last couple of decades. However, the Federal Reserve wants to see the annual inflation rate stay around 2%.
The CPI started to rise above normal levels during the pandemic until it appeared to peak in June 2022, when the year-over-year increase was reported at 8.9%. The Fed took steps to slow down inflation by increasing interest rates. The effort appeared to be working based on the CPI’s steady downward trend in 2023. But that progress has stalled in recent months.
In March, the CPI rose faster than economists expected, according to Morningstar, an investing firm.
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.
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. 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 | 36.18% |
Food | 13.50% |
Energy (fuel, utilities) | 6.75% |
Medical care services | 6.50% |
Transportation services (insurance, airfare, etc.) | 6.39% |
New vehicles | 3.65% |
Source: Bureau of Labor Statistics
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.”
How is CPI used?
The CPI is closely watched as an economic indicator. As a proxy for inflation, it can help show how the economy is doing overall. 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. 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 $84,504 in today’s dollars, according to the CPI inflation calculator on the BLS website.
Next CPI report
The next CPI report will be released May 15. It will detail how average prices changed in April.
