What Is the Consumer Price Index (CPI)?

An index measures the change in the price of a representative basket of goods and services such as food, energy, housing, clothing, transportation, medical care, entertainment, and education. It's also known as the cost-of-living index.

Understanding the Consumer Price Index (CPI)

Inflation is the decline of a given currency's purchasing power over time; alternatively, a general rise in prices. A quantitative estimate of the rate at which the reduction in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some time. The rise in the general level of prices often expressed as a percentage means that a currency unit effectively buys less than in prior periods.

How Is CPI Used?

CPI is an economic indicator. It is the most widely used measure of inflation and, by proxy, of the effectiveness of the government's monetary policy. The CPI gives the government, businesses, and citizens an idea about price changes and can act as a guide to make informed decisions about the economy.

The CPI and the components that make it up can also be used as a deflator for other economic indicators, including retail sales and hourly/weekly earnings. Additionally, it can be used to value a consumer's dollar to find its purchasing power. Generally, the dollar's purchasing power declines when the aggregate price level increases and vice versa.

The index can also be used to adjust people's eligibility levels for certain types of government assistance, including Social Security, and it automatically provides the cost-of-living wage adjustments to domestic workers. According to the BLS, the cost-of-living adjustments of more than 50 million people on Social Security and military and federal civil services retirees are linked to the CPI.