What is the Consumer Price Index (CPI)? Why is it important?

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in consumer prices of goods and services based on a representative basket of goods and services.

The ‘basket’ of goods and services used to calculate the CPI includes popular items Americans tend to regularly purchase. Per the United States Bureau of Labor Statistics (BLS): “The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought”.

The United States Bureau of Labor Statistics releases a monthly Consumer Price Index (CPI) report that includes data about how the prices of different goods and services changed over the last month and over the last 12-month period.

Meaning every month, we tend to look at how the index changed relative to the last month (MoM) and relative to 12 months ago (YoY).

Example of CPI: Imagine you buy a gift basket for one of your friends. You buy the essentials- eggs, milk, toothpaste, etc. Let’s say you give the gifts in the basket different weightings based on their importance. After assigning weightings, you then find the average cost of the goods in your basket respective to the weightings. In this case, the average price for your basket was $1.00.

Well, one year later, you return to buy the same basket for your friend. Expect this time; it costs you $1.03 per gift in the basket.