What is the consumer price index and how is it used?
Every month, government economists at the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor release the latest Consumer Price Index (CPI), which is a measure of the average change over time in the price paid by urban households for a set of consumer goods and services. The expenditure items are classified into some 200 categories that are arranged into eight groups (e.g., food and beverages or medical care).
The percent change in the CPI provides a measure of inflation, which is useful for a range of purposes. Relevant to the topic of poverty is the CPI's use by Census Bureau analysts to adjust the official poverty measure for inflation each year.
The CPI reflects the spending patterns of each of two population groups: all-urban consumers and urban wage earners and clerical workers, which include professionals, the self-employed, the unemployed, and poor persons. The all-urban group represents about 87 percent of the U.S. population.
The CPI is used as an economic indicator, a deflator of other economic series, and a means of adjusting income payments (e.g., over 2 million workers are covered by collective bargaining agreements that tie wages to the CPI).
While sometimes referred to as a cost-of-living index, the CPI differs in important ways from a complete index because it does not take into account changes in other factors that affect consumer well-being and are difficult to quantify, such as safety, health, water quality, and crime.
As described on the BLS website, alternative price indices lead to significantly different conclusions regarding price changes over long periods of time. These differences affect conclusions regarding time trends in the population of families with incomes below the poverty line.
The price-change experience of the all-urban consumer group is measured by the traditional Consumer Price Index for All Urban Consumers (CPI-U) and the newer Chained Consumer Price Index for All Urban Consumers (C-CPI-U), the latter of which is closer to a cost-of-living index in that it adjusts for consumers' substitutions among expenditure items in reaction to relative price changes.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is based on the expenditures of households included in the CPI-U definition that get more than half their income from clerical work and that have at least one earner who has been employed at least 37 weeks during the previous 12 months. The Social Security Administration uses the CPI-W to annually adjust benefits paid to Social Security beneficiaries and Supplemental Security Income (SSI) recipients. The CPI-W's population represents about 32 percent of the total U.S. population, and is a subset of the CPI-U.
In February 2015, the BLS introduced a new estimation system for the Consumer Price Index, the first major improvement in more than 25 years. The new system has enhanced flexibility and review capabilities. As part of the redesign process, a few minor changes in methodology were introduced, most of which affect the imputation of price changes.
See the Bureau of Labor Statistics' website for detailed information about the CPI, how its various measures are calculated, and how to obtain CPI statistics.