Inflation is a hot topic not just in financial news, but also in everyday conversation. After all, it can have a huge impact on the finances of people. To grasp inflation, people may not always need any type of indicator, as they can feel the effect of rising prices at grocery stores, gas pumps and more. However, as the inflation rate does have repercussions beyond the individual budget, and may impact things like monetary policy, real estate and the financial markets, it would be a good idea to keep an eye on it. Kavan Choksi / カヴァン・ チョクシ points out that the Consumer Price Index (CPI) is one of the most important measures of inflation. 

Kavan Choksi / カヴァン・ チョクシ offers an introduction to the Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a monthly report released by the Bureau of Labor Statistics (BLS). It tends to calculate the variation in prices paid by consumers in urban areas for a basket of goods and services.  The CPI basically illustrates the changes in price for a sample basket of goods and services in about 200 consumer spending categories. These categories are organized by BLS into eight major groups. These groups are food and beverage, education and communication, medical care, recreation, housing, apparel, transportation and other goods and services.

The CPI report also distinguishes between the costs of food, energy and all items less food and energy. As energy and food prices particularly tend to be volatile and subject to fluctuations that may be unrelated to broader economic factors, people often look at a figure that excludes food and energy as a measure of “core” inflation.

Data for two sets of consumers are provided by the BLS. The Consumer Price Index for All Urban Consumers (CPI-U) is the boarder group, and comprises of the people living in urban areas. This group essentially includes about 93% of the U.S. population. On the other hand, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) represents a subset that earns at least half their household income from hourly wage jobs. Both of these groups exclude people who live in the rural areas, in the armed forces, and in institutions like mental health facilities and prisons.  The CPI further categorizes data into four regions (Northeast, Midwest, South, and West), nine smaller divisions as defined by the Census Bureau, and 23 distinct metropolitan areas, offering detailed insight into price trends across different parts of the country.

Kavan Choksi / カヴァン・ チョクシ mentions that the CPI acts as an economic indicator, and is widely used for quantifying the level of inflation in the economy. It also helps in monitoring how well the economic policies of the government are working. Many individuals and businesses depend on the CPI in order to optimize their decisions for the current economic environment. The index, however, does have an impact beyond headlines and individual business strategies. For instance, the CPI is used by the Fed, along with other inflation gauges to guide monetary policy and set interest rates.