Why Does the Consumer Price Index Matter?
Children learn the concept of inflation the first time they’re forced to listen to a story about how it once cost a quarter to go to the movies. The price of goods and services increases over time as the buying power of currency declines.
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The Consumer Price Index (CPI) tracks those changes by measuring what it costs to buy the things that most people spend money on — but not for a government shopping list. The CPI helps economists measure inflation and the cost of living, two forces that will influence the most basic aspects of your entire financial life, like your socioeconomic status and standard of living.
The CPI Tracks the Price You Pay for the Things You Buy
The Bureau of Labor Statistics (BLS) compiles and reports the CPI on a monthly basis. It maintains records dating back to 1913, but it uses the inflation rate from 1982-84 for the baseline, which is measured with a CPI score of 100.
The Consumer Price Index:
- Calculates the weighted average cost of “baskets” of primary consumer goods and services like food, shelter, energy, transportation and healthcare
- Measures changes in the average price of those goods and services over time
- Quantifies the purchasing power of U.S. currency
It’s What Economists Do With the CPI That Really Counts
Economists use data from the Consumer Price Index to do three things: gauge the rate of inflation, calculate the cost of living and measure the effectiveness of U.S. economic policy.
The CPI Helps Policymakers Do a Delicate Inflation Tightrope Walk
By analyzing the CPI, economists can gauge the rate of inflation. The higher the rate of inflation, the more dollars you’ll need tomorrow to buy the exact same stuff you’re buying today.
Inflation makes your cash less valuable and erodes your standard of living, but it isn’t always a bad thing. Inflation can occur, for example, when the economy is growing and expanding. When fewer people are unemployed, more people have more money to spend, which increases demand for goods and services and causes prices to rise.
Too much inflation, however, and high prices force people to buy fewer things as their standard of living declines. Businesses, now selling fewer products and services, have to cut back on spending and hiring, which leads to greater unemployment and even more economic pain.
The CPI helps policymakers maintain a balance between too much inflation and too little.
The CPI Is Also the Basis of the Cost-of-Living Index
The government doesn’t publish a cost-of-living index, but several agencies and organizations with their own economists do. Those indexes wouldn’t be possible without data from the CPI. The CPI, after all, tracks the changing cost of things that average people buy as part of their daily lives.
The exact same expenses that the CPI tracks — housing, food, transportation, healthcare, utilities, etc. — also determine the cost of living in a specific city, metro region, state or country. There are plenty of nice places in rural Upstate New York where a $50,000 salary would be more than enough to carve out a nice life with nice things. Take that same $50,000 a few hours south to Manhattan, and you’d be hard-pressed to find a realtor who would shake your hand.
Much more than just a list of product prices, the CPI measures the standard of living you can expect to experience depending on where you live and how much you earn. It also can tell you how long you’ll be able to maintain that lifestyle before the constant nibbling of inflation tells you it’s time to move.
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