Finance for Dummies – CPI


Finance for Dummies is a series about personal finance topics for those without a PhD in Finance!

Consumer Price Index – CPI

What is the CPI?

The Consumer Price Index is a measure of the average change in the price of a basket of consumer goods and services. 1982-1984 is used as the base and equals 100.  There are different versions of the CPI, for instance CPI-U includes food and energy.

What is included in the CPI?

  • FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
  • HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
  • APPAREL (men’s shirts and sweaters, women’s dresses, jewelry)
  • TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
  • MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services)
  • RECREATION (televisions, toys, pets and pet products, sports equipment, 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).

How is CPI information collected?

Each month, data collectors from the Bureau of Labor Statistics (BLS), call or visit thousands of retail stores, doctor’s offices, colleges, and apartments, collecting price information for over 80,000 items for consumers living in urban areas.

How is the CPI used?

  • As an economic indicator.  The CPI measures price inflation for consumers.
  • To adjust other economic measurements. For instance the CPI is used to calculate Social Security Cost-of-Living increases.
  • To adjust the value of the dollar.  The CPI is used to adjust Federal Income Tax structure to prevent bracket creep.

Where can I find more information?

The Bureau of Labor Statistics has current CPI statistics for many U.S. metropolitan areas.

 

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24 Responses to Finance for Dummies – CPI

  1. Miss T @ Prairie Eco-Thrifter 11/16/2011 at 7:59 am #

    Great series. Finance for Dummies. I love it. I used to be a finance dummy so I can vouch for how valuable this kind of information is.

    You should add some Canadian terms to your series. It will help get more discussion going.

    • Paul 11/16/2011 at 9:59 am #

      I think there is a need to explain finance and economic concepts in plain english. I’m glad you liked the first of many posts!

  2. JP @ Novel Investor 11/16/2011 at 8:57 am #

    Good timing on this one. They just released the CPI-U for October this morning, down 0.1%.

    Don’t think there should be target requirements before the CPU is used to adjust social security or taxes brackets.

  3. cashflowmantra 11/16/2011 at 10:14 am #

    Prices were up 3.5% compared to a year ago. Real interest rates are negative and purchasing power is being lost on a daily basis. This is in the face of high unemployment and slack demand. Should either of those improve, inflation will be going through the roof.

  4. krantcents 11/16/2011 at 12:57 pm #

    One of the things I find interesting about CPI statistics is how it can be misused! The Federal government uses another version of the CPI so they can leave out the cost of food and oil?gas. They say these are commodities that will fluctuate. Yet they are an important part of our lives and our expenses.

    • Paul 11/16/2011 at 5:14 pm #

      There are many forms of CPI, CPI-U including food and energy and CPI-U without. Some users of BLS Data use CPI because they want to measure the underlying core rate of inflation. Food and energy prices are volatile and can distort the core rate of inflation.

    • The Jenny Pincher 11/17/2011 at 7:47 am #

      I also always have a problem understanding this because it seems like a lot of the information is manipulated for the agenda being pushed at the time.
      Thanks for taking the time to explain this in your finance for dummies series!

  5. YFS 11/16/2011 at 2:56 pm #

    I was just about to post about how the government misuses this metric to suit it’s agenda. From my understanding CPI often is off on it’s inflation metric due to the use of aggregating historic information.

    • Paul 11/17/2011 at 6:12 am #

      Depends which measure you are looking at. BLS uses 82-84 as baseline and sets that standard at 100. So when you you look at CPI-U with food and energy for Oct 11 prices are down -.2% in relation to what the basket of goods and services cost in the baseline years. It is a relative change. I’ll be looking for your post, love to read more about the topic!

  6. Lisa @ Cents To Save 11/16/2011 at 3:24 pm #

    Aha!! This is the series for me. “Finance for Dummies”, I can’t wait for the rest of the series!

  7. Shaun @ Money Cactus 11/17/2011 at 5:04 am #

    Thanks for the run down, I’ve always struggled a little in understanding the use and effect of CPI. I think I’m going to lik this series, I still have a lot to learn!

    • Paul 11/17/2011 at 6:32 am #

      I’m glad you found the article useful Shaun!

  8. Shaun @ Smart Family Finance 11/17/2011 at 5:34 am #

    I love seeing economics featured so regularly here. CPI is great information and I sometimes use the basket of goods info for when I’m shopping.

  9. Ron 11/17/2011 at 9:13 am #

    The CPI is really a good thing to understand. It is easy to think that one can go out and spend those cost of living increases on frivolousness goods, but one good look at that CPI index one ought to know better.

  10. For Dummies 12/16/2011 at 11:17 am #

    Always enjoy your blog! I love seeing economics featured so regularly here.

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