• Overview
• Concepts
  • The CPI as a cost-of-living framework
  • CPI index values
  • Structure and classification
  • Scope and exclusions
• Data sources
• Design
• Calculation
• Presentation
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Handbook of Methods Consumer Price Index Concepts

Consumer Price Index: Concepts

The Consumer Price Index (CPI) consists of a family of indexes that measure price change experienced by urban consumers. Specifically, the CPI measures the average change in price over time of a market basket of consumer goods and services. The market basket includes everything from food items to automobiles to rent. The CPI is perhaps the most noted measure of consumer inflation in the United States, and it is used by policy makers to understand and analyze the economy. It is used in many official contexts, for example to escalate Social Security and other federal payments, to adjust tax brackets, to deflate other time series data, and to convert nominal dollars to real dollars. It is also widely used by businesses and private citizens to adjust wages and to escalate rents and other payments.

The CPI as a cost-of-living framework

The CPI is widely used as a cost-of-living index (COLI), which answers the hypothetical question concerning what expenditure level is needed to achieve a standard of living attained in a base period at current market prices. The ratio of this hypothetical cost to the actual cost of the base-period consumption basket in the base period is the COLI. The cost of living is affected by many things not captured in market transactions, and the cost of achieving a living standard cannot be observed directly, so the CPI only approximates a cost-of-living index. The CPI is sometimes called a conditional COLI, since the factors that affect the cost of living that aren't in scope are implicitly held constant. The concept of the COLI provides the CPI measurement objective and is the standard by which any bias in the CPI is defined.

The CPI is constructed using a set of interlocking surveys, and it is fundamentally a measure of price change. The CPI follows the prices of a sample of items in various categories of consumer spending, encompassing a majority of all goods and services purchased by urban consumers for consumption.

The CPI focuses on the consumer experience of inflation, therefore the price sought is typically the consumer's out-of-pocket price, including sales and excise taxes. (This contrasts with the Producer Price Index, which focuses on what is received by the producer.) Prices are collected during the course of the entire month, with a certain amount of price data collected in each of three pricing periods. CPI data correspond to a month, not a specific date.

The monthly movement in the CPI comes from weighted averages of the price changes of the items in the CPI sample. A sample item’s price change is the ratio of its price at the current time to its price in a previous time.

CPI index values

The CPI computes and publishes index values, which are normalized to equal 100 in a chosen base period (1982–84 for most indexes). Index values can be interpreted as representing an estimate of the price level relative to the base period. Percent change in the index is an estimate of the percent change in the price level over the period in question. The CPI publishes index values, along with 1-month and 12-month percent changes; the 12-month percent change is the most frequently referenced change. Note that while index values serve as a proxy for the price level, index levels of different series cannot be used to directly compare the cost of living in two areas. That is to say, an index level of 200 for one region or metropolitan area does not necessarily represent a higher price level than a value of 150 for another area, instead it shows that prices have increased more in the first area in the time since the base period.

While the CPI program primarily publishes indexes that measure the change in price over time, it also publishes average price data for a limited set of food and energy items for the United States, census regions, census divisions, and published metropolitan areas.

Structure and classification

The CPI is calculated in a two-stage process. First, basic indexes are calculated; these are indexes for specific item-area combinations. Ice cream and related products in the Chicago-Naperville-Elgin metro area are an example. These are structured by item category and geographic location. In the second stage, the basic indexes are aggregated into broader indexes, all the way up to the all items U.S. city average index. Thus, the CPI has both a geographic structure and an item structure.

Items

Expenditure items are classified in the CPI into more than 200 categories, arranged into 8 major groups. This item structure is unique to the CPI and the categories themselves do not correspond to the North American Industry Classification System (NAICS), other price indexes, or other statistics.

Eight major groups and examples of categories in each follow:

• Food and beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
• Housing (rent of primary residence, owners' equivalent rent, utilities, bedroom furniture)
• Apparel (men's shirts and sweaters, women's dresses, baby clothes, shoes, jewelry)
• Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
• Medical care (prescription drugs, medical equipment and supplies, physicians' services, eyeglasses and eye care, hospital services)
• Recreation (televisions, toys, pets and pet products, sports equipment, park and museum admissions)
• Education and communication (college tuition, postage, telephone services, computer software and accessories)
• Other goods and services (tobacco and smoking products, haircuts and other personal services, funeral expenses)

Additionally, for analytical purposes, the CPI is also divided into food, energy, and all items less food and energy. The CPI for all items less food and energy gets considerable attention as a measure of underlying core inflation, which is not subject to the volatile movements of food and energy prices. A third structure separates the CPI into commodities and services, with commodities further divided into durables and nondurables. All three structures are comprehensive, with the subcomponents in each structure aggregating to the all items index.

Geography

The CPI is computed for several geographic areas, which are either large metropolitan areas or groups of smaller metropolitan areas in the same region. CPI data are published for 23 metropolitan areas, 4 geographic regions, and 9 divisions as defined by the Census Bureau. Additionally, the CPI is published for two different size classes (above and below 2.5 million in population) at the national and regional level. Question 19 on the CPI Questions and Answers page shows a list of published areas.

Population

The CPI is computed officially for two different populations.

The CPI for all urban consumers (CPI-U) is the broadest measure and is the most widely used CPI. It is based on the expenditure patterns of a sample of urban consumers representing over 90 percent of the population.

Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, farm households, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals. Consumer inflation for all urban consumers is measured by two indexes—namely, the CPI-U and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U).

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is based on the expenditures of urban households included in the CPI-U definition that also meet two additional requirements: more than one-half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. The CPI-W population represents approximately 30 percent of the total U.S. population and is a subset of the CPI-U population.

Seasonality

Expenditure patterns can change dramatically during the year, for example, around holidays. A statistical process called seasonal adjustment can be done to remove typical seasonal influences, which helps economists better identify underlying trends. CPI publishes both seasonally adjusted (SA) data and not seasonally adjusted (NSA) data. Seasonally adjusted data are typically used to understand and analyze month-to-month price change; not seasonally adjusted data are typically used for official purposes, including escalation of government payments and for studying longer term price movement. Seasonally adjusted data are only published at the nationwide level, and not all categories are seasonally adjusted.

Base periods

The base period is when the time series of index values is normalized to 100. The current standard base for most categories is 1982–84 = 100. Some indexes are also published on an alternate base, which is most often 1967 = 100. Some newer indexes have more recent bases, which are typically the first month of their computation equaling 100.

An index is fully described by its item category, geographic location, population, seasonality, and base. In its databases, BLS uses descriptions with codes for each of these variables to identify a specific CPI. Additional information about Series ID codes is available at the BLS Help & Tutorials page.

Scope and exclusions

The CPI provides an approximation to a conditional COLI, pricing consumer goods and services. Free goods, the quality of the environment, goods provided by the government at no cost, and the value of leisure time, are all out of scope, despite affecting the cost of living as broadly defined.

Excluded goods and services

The CPI covers the consumption sector of the U.S. economy, which is defined as the purchase of goods and services for use by households. Consequently, the CPI excludes investment items, such as stocks, bonds, real estate, and business expenses. Life insurance is also excluded for this reason, although health, household, and vehicle insurance are in scope. Employer provided in-kind benefits are viewed as part of income rather than consumption. Purchases of houses, antiques, and collectibles are viewed as investment expenditures and therefore excluded. Gambling losses, fines, cash gifts to individuals or charities, and child support and alimony payments also are out of scope. Interest costs and finance charges are also out-of-scope. The CPI excludes illegal goods and services and the value of home-produced items because of the practical difficulties of collecting the data.

Government-provided and government-subsidized items

The CPI treats any changes to fees that the government charges for items, such as admission to a nation­al park, as in-scope changes in price. The CPI also counts the price of subsidized items that is available to the general public. For example, govern­ments may subsidize local transit operations. If the subsidy is cut and the fare is raised, the CPI will reflect this as a price in­crease. On the other hand, the CPI does not reflect changes to means-tested subsidies (dependent on the recipient’s income), such as the Supplemental Nutrition Assistance Program or Section 8 housing allowances. Changes in such subsidies are treated as changes to the recipient’s income and are out of scope.

Taxes

The CPI excludes income tax and other direct taxes; however, it does include the effects of changes in sales taxes and other indirect taxes paid on consumer products. No attempt is made to reflect changes in the quantity or quality of government services paid for through taxes.