Consumer Price Index (CPI) Definition

What is CPI (Consumer Price Index)?

The Consumer Price Index, or CPI, is a metric which measures inflation by calculating the price change for a basket of goods. “Basket of goods”in this context refers to goods associated with the cost of living: transportation, food, medicine, energy, etc. The CPI establishes the prices during a base year, and calculates the price increase or decrease of the same goods during a later year.

CPI is one of the primary metrics used to identify periods of inflation or deflation. It can also be used to estimate the purchasing power of a country’s currency.

Subscribe to the Finance Strategists YouTube Channel ↗

How to Calculate CPI

The CPI formula is calibrated to “100”by using the average cost of goods during 1982, 1983, and 1984 as a baseline. So a CPI of 125 indicates a 25% increase in the level of inflation compared to the baseline years.

CPI (Inflation)

But, calculating the current rate of inflation is a little different.

Annual inflation rates are calculated by computing the % change in the CPI year over year.

So, a CPI of 255 from April 2019 to a CPI of 258 in April 2020 is calculated like this:

(258-255)/255=1.18%

There are two separate CPI indexes to account for the varying consumption of different sectors of the population.

The CPI-U index considers the spending habits of urban consumers, which accounts for about 88% of the US population.

The CPI-W is the price index for “urban wage earners and clerical workers,”which is used to calculate changes in the costs of benefits paid to those on Social Security.

Another common gauge is CPI ex-food and energy, where food and energy are excluded due to their volatile nature.

Consumer Price Index (CPI) Definition FAQs

CPI stands for Consumer Price Index.
The Consumer Price Index, or CPI, is a metric which measures inflation by calculating the price change for a basket of goods.
The CPI formula is calibrated to “100” by using the average cost of goods during 1982, ‘83, and ‘84 as a baseline. A CPI of 125 indicates a 25% increase in the level of inflation compared to the baseline years.
CPI is one of the primary metrics used to identify periods of inflation or deflation. It can also be used to estimate the purchasing power of a country’s currency.
The CPI-U index considers the spending habits of urban consumers, which accounts for about 88% of the US population. The CPI-W is the price index for “urban wage earners and clerical workers,” which is used to calculate changes in the costs of benefits paid to those on Social Security. Another index is CPI ex-food and energy - excluded due to their volatile nature.