Definition
The Consumer Price Index, or CPI, is an index number that tracks how the cost of a fixed bundle of consumer goods and services changes over time. Statistical agencies survey thousands of prices each month for items such as food, housing, transportation, medical care, and recreation, then weight each category by how much a typical household spends on it.
The index is anchored to a base period assigned a value of 100. If the CPI reads 130, prices on average are 30 percent higher than they were in the base period. The percentage change in CPI from one year to the next is the most widely cited measure of consumer inflation.
Why it matters
How it works
Agencies first determine the basket and its weights using household spending surveys. Each month, price collectors record the cost of the same items in the same outlets. The new total cost is divided by the base-period cost and multiplied by 100 to produce the index level. Core CPI strips out volatile food and energy prices to reveal the underlying trend. Over long periods the basket is updated to reflect changing consumption habits, which is why CPI is an approximation rather than a perfect cost-of-living measure.