Consumer Price Index (CPI)
Definition of 'Consumer Price Index (CPI)'
The CPI is based on a market basket of goods and services that is representative of the spending of a typical American household. The BLS surveys households to determine how much they spend on different items, such as food, housing, transportation, and clothing. The prices of these items are then collected from a variety of sources, such as retailers, manufacturers, and service providers.
The CPI is calculated by taking the average price of the items in the market basket and comparing it to the price of the same items in a previous period. The resulting figure is expressed as a percentage change.
The CPI is used to measure the rate of inflation. Inflation is the general increase in prices of goods and services over time. The CPI is considered to be a good measure of inflation because it reflects the changes in prices that consumers actually face.
The CPI is also used to adjust for inflation when comparing the prices of goods and services over time. For example, if the CPI increases by 2%, then a product that cost $100 in the previous year will cost $102 in the current year.
The CPI is a valuable tool for tracking inflation and for making economic decisions. It is used by businesses, investors, and policymakers to make informed decisions about the economy.
Here are some additional things to know about the CPI:
* The CPI is calculated monthly.
* The CPI is based on a fixed market basket of goods and services. This means that the CPI does not reflect changes in consumer spending patterns.
* The CPI is not a perfect measure of inflation. It can be affected by factors such as changes in the quality of goods and services, changes in consumer preferences, and changes in the way that prices are collected.
Despite its limitations, the CPI is still considered to be the best available measure of inflation. It is used by the Federal Reserve to set monetary policy and by the government to make adjustments to social security benefits.
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