What is a Consumer price index (CPI)?
The Consumer Price Index, or CPI, is a way to measure how much prices have gone up or down for things that people usually buy, like food, clothes, and gas. Every month, the government looks at a big list of things and how much they cost. They use that information to figure out if prices have gone up a lot or a little.
The function of the CPI is to give us an idea of how much prices have changed over time. It helps us see if things are getting more expensive or if they're staying about the same. It also helps the government make decisions about things like how much money to give to people who need help.
The economic relevance of the CPI is that it helps us understand how the economy is doing. If the CPI goes up a lot, it means that prices are going up a lot and that can be a bad sign for the economy. If the CPI stays about the same or goes down, it means that prices aren't changing much, and that's usually good for the economy. It also helps people who are saving money or investing, because it gives them an idea of how much their money will be worth in the future.
Core inflation and total inflation are both ways to measure how much prices have gone up or down. But they measure different things.
Total inflation looks at all the prices for everything people usually buy, like food, clothes, gas, and other goods and services. It's like taking a comprehensive picture of the market.
Core inflation is a bit different. It looks at all the prices for everything people usually buy, but it excludes some items that can cause prices to fluctuate significantly, such as the prices of fuel and food. These prices can vary greatly from month to month and can make it difficult to see if prices are truly increasing or decreasing. It's like taking a picture of the market but leaving out some of the items that can cause prices to fluctuate greatly.
The Consumer Price Index (CPI) only uses core inflation because it gives a more accurate idea of how much prices are changing over time. By excluding items that fluctuate greatly in prices, like fuel and food, it helps to observe if prices are increasing or decreasing in a more stable way.
Simplified Example
The consumer price index (CPI) is an economic measure of the change in the price level of a basket of goods and services over a certain period of time. It can be best understood with an analogy - imagine the CPI as the menu at a restaurant. The prices on the menu represent the overall market prices of goods and services, and when you order something, that represents the purchasing of a basket of goods and services. Just as the prices on the menu can change over time, so too can the prices of the goods and services in the basket that you purchase, as represented by the CPI.
History of the Consumer Price Index (CPI)
The history of the Consumer Price Index (CPI) dates back to the aftermath of the Great Depression in the United States during the early 20th century.
Initially conceived in the 1930s as the Cost-of-Living Index by the Bureau of Labor Statistics (BLS), the precursor to the CPI aimed to gauge the impact of inflation on urban households' expenses. However, it was not until 1971 that the index underwent a substantial transformation and was officially renamed as the Consumer Price Index. Over time, the methodology and scope of the CPI expanded, incorporating a more diverse and comprehensive array of goods and services to accurately reflect consumers' spending patterns.
Today, the CPI stands as a cornerstone of economic measurement globally, utilized by governments, businesses, and policymakers to monitor inflation, adjust fiscal policies, and make informed decisions crucial to economic stability and public welfare.
Examples
U.S. CPI: The U.S. CPI is a measure of the average change in prices paid by urban consumers in the United States for a basket of goods and services, including food, housing, clothing, transportation, medical care, and recreation. The U.S. Bureau of Labor Statistics publishes monthly CPI reports for the U.S. economy.
Eurozone CPI: The Eurozone CPI is a measure of the average change in prices paid by consumers in the eurozone for a basket of goods and services, including food, housing, energy, transport, and communication. The Eurostat agency publishes monthly CPI reports for the eurozone.
China CPI: The China CPI is a measure of the average change in prices paid by urban consumers in China for a basket of goods and services, including food, clothing, housing, medical care, and education. The National Bureau of Statistics of China publishes monthly CPI reports for China.
Related terms
Inflation: The meaning of inflation is an economic phenomenon that occurs when the prices of goods and services start to rise over time.
Bid/Ask Spread: The meaning bid-ask spread is a key concept in the financial markets that refers to the difference between the highest price a buyer is willing to pay for an asset, known as the bid price, and the lowest price a seller is willing to accept for the same asset, known as the ask price.