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CPI Release Explained: All You Need to Know

Inflation is one of the main reasons for concern for many consumers and traders. In addition, it is one of the key factors that affect central banks’ monetary policies, thus driving the overall trajectory of the economy and affecting the financial markets. While there are many inflation indicators, the consumer price index (CPI) is one of the most referred to. Let’s dive deep into this:

CPI wooden blocks on top of coin stacks

TL;DR

  • CPI (Consumer Price Index) measures the price changes of goods and services most consumers purchase, affecting their household budgets.

  • PPI (Producer Price Index) tracks price changes at the wholesale level, indicating what businesses pay before goods reach consumers.

  • PCE (Personal Consumption Expenditures) is similar to CPI but includes more goods and services and focuses more on healthcare.

  • Each index helps policymakers, businesses, and consumers assess inflation but differs in scope and focus.

What Is the BLS (Bureau of Labor Statistics)?

The Bureau of Labor Statistics (BLS), founded in 1884 and later moved to the Department of Labor in 1913, is responsible for collecting and analysing economic data, particularly labour market statistics. It tracks key indicators like the Consumer Price Index (CPI), which measures inflation by tracking the price changes of a basket of goods and services, and employment statistics. Moreover, the BLS helps inform economic policies, such as interest rates and social benefit adjustments. Through surveys and data collection, including retail prices and housing costs, the BLS adapts to economic shifts, like the introduction of Chained CPI in the 2000s. Its evolution from a small agency to a vital resource for understanding labour and economic conditions highlights its growing role in public policy.

What Is CPI?

The CPI is the most widely used tool to measure inflation, or its inverse, deflation. This important tool calculates how the price of a wide range of market goods shifts over time.

The Dollar (DX)’s relative purchasing power can also be estimated indirectly with the CPI, by seeing whether an amount of goods can be purchased with more or less money compared to the previously-measured period. The prices of over 90,000 goods are monitored by the Bureau of Labor Statistics every month; when inflation rates are quoted in the media, it is important to understand whether the periods of comparison are months, quarters, or years, in order to accurately understand the time range of price increases. 

However, some raise the concern that the CPI has drawbacks as a measure of the U.S. economy’s health, as it fails to account for the diversity of consumption patterns adopted by American consumers, and may even underestimate inflation. Despite these potential disadvantages, it’s still preferred by professional economists and policymakers alike to judge whether inflation is within the ‘ideal’ two- to three-percent range. 

How Does CPI Work?

The BLS monitors the prices of over 90,000 goods every month. When inflation rates are quoted in the media, it is important to understand whether the periods of comparison are months, quarters, or years to accurately understand the time range of price increases. 

CPI Sectors: What Is Measured in CPI?

  • Housing 

  • Food and Beverages

  • Medical Care

  • Apparel 

  • Recreation 

  • Transportation 

  • Education and Communication 

  • Other Goods and Services

What Are the Different Types of CPI?

It is important to note that the BLS releases two different types of CPI every month: the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W). (Source: Investopedia)

CPI-U

CPI-U, commonly called CPI in the news, tracks the majority (93%) of the US population that resides outside of remote rural areas (as such, it excludes military bases, farm households, and other institutions). 

CPI-W

The CPI-W index tracks about 29% of the US population who earn income from hourly wages or clerical jobs. 

CPI Formula: How Is CPI Calculated?

To calculate CPI, the BLS takes the cost of the market basket in a given year divided by the cost of the market basket at base multiplied by 100.

Consumer price index calculation formula

Who Does the CPI Help?

Various bodies utilise the CPI, and these are as follows:

Criticism of CPI

Some raise the concern that the CPI has drawbacks as a measure of the U.S. economy’s health.  It fails to account for the diversity of consumption patterns adopted by American consumers and may even underestimate inflation. Despite these potential disadvantages, professional economists and policymakers alike still prefer to judge whether inflation is within the ‘ideal’ two—to three percent range.

CPI vs. PCE vs. PPI: The Difference  

CPI, PPI, and PCE all measure inflation but differ in focus. CPI tracks consumer prices for goods and services, reflecting household inflation. PPI measures price changes at the wholesale level, showing how much businesses pay for goods before reaching consumers. PCE, similar to CPI, looks at consumer spending but covers a broader range of goods and services, emphasising healthcare. Each index differs in what it tracks, how it weighs items, and its use.

Conclusion 

Inflation remains a significant factor affecting global economies, with CPI, PPI, and PCE playing vital roles in tracking price changes and influencing monetary policy. CPI is the most recognised index because it directly reflects the changes in the cost of living for households, making it relatable and widely reported in the media. While each measure offers a distinct view of inflation, CPI’s focus on consumer goods and services makes it particularly useful for understanding everyday economic impacts, aiding in informed economic decisions and market planning.

CPI FAQs:

What does CPI measure? 

CPI tracks how the prices of goods and services most commonly purchased by consumers change over time, helping measure inflation.

How does the BLS calculate CPI?

The BLS monitors over 90,000 goods and services monthly, comparing current prices to those from a previous period.

What’s the difference between CPI and PPI? 

CPI measures consumer prices, while PPI measures wholesale prices, showing how much businesses pay for goods before selling them to consumers.

Why is CPI important?

CPI helps policymakers, businesses, and consumers understand inflation trends, influencing decisions like interest rates and spending.

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