The CPI Consumer Price Index what it is and why it matters

The CPI Consumer Price Index what it is and why it matters

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Episode Transcript

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The Consumer Price Index CPI is aclosely watched statistic that measures changes in the
prices paid by urban consumers for arepresentative basket of goods and services. The
CPI is a key indicator relied uponby government agencies, businesses, and citizens
to gauge inflationary trends and cost ofliving impacts. Understanding what goes into the

(00:21):
CPI calculation, how it complements otherinflation metrics like PCEE, its influence on
monetary policy and recent patterns is valuablefor all types of economic analysis and financial
decision making. What is the ConsumerPrice Index CPI? The Consumer Price Index
CPI is a monthly economic indicator compiledand published by the US Bureau of Labor

(00:42):
Statistics BLS. The tracks average pricechanges paid by urban consumers for a fixed
market basket of consumer goods and services. Over eighty thousand price inputs tied to
specific items are collected each month fromretailers, service providers, rental units,
doctor's offices, car dealers, andmore. The core CPI statistic then measures

(01:04):
how those prices evolve over time.The index aims to capture typical out of
pocket expenditures across the following spending categoriesfood and beverages and housing costs, apparel,
transportation costs, medical care, recreationand education, and communication, other
goods and services. And the CPIactually comprises several sub indexes based on item

(01:26):
types and user populations, including oneCPI for all urban consumers CPIU most widely
cited, covering ninety three percent ofpopulation, two CPI for urban wage earners
and clerical workers CPIW applied to setcost of living adjustments for programs like Social
Security. Three chain CPI accounts forconsumer item substitution when prices shift between categories.

(01:49):
At a high level, the ConsumerPrice Index gives a snapshot of retail
price inflation experienced by typical consumers inthe economy. It acts as both an
economic indicator and cost of living adjustmentmechanism for a variety of uses. How
is the Consumer Price Index calculated?While a retail price index concept seem straightforward,

(02:10):
bls statisticians follow rigorous protocols ensuring CPIaccuracy as an economic benchmark. Several
key steps underlying CPI construction include themarket basket composition, aims to reflect typical
consumer spending patterns. Items with substantialregular expenditures are weighted more heavily based on
data from the Consumer Expenditure Survey.For example, different food items are chosen

(02:34):
versus apparel items purchased. Selected productsalso aim to capture differences across geographic areas.
Field data collectors sample prices physically instore as well as catalog online prices
for specified items across retail outlets ofall types, grocery stores, health providers,
rental units, etc. Strategies ensureproper geographic dispersion and outlet sizes based

(02:59):
on where consumers actually shop. Ruralareas require different sampling than major metro areas.
For instance, prices are gathered throughsite visits, retailer contacts, web
scraping of retail sites, and directfeeds from voluntary reporter programs. Data inputs
aim for at least eighty one hundredand ten price quotes per item category.

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The relative importance of each spending categoryin the index calculation is determined based on
actual household expenditure distributions. Again referringto Consumer Expenditure Survey reports, categories like
housing and food have much larger weightscompared to apparel based on typical spending.
Given the thousands of prices collected andweighted across spending categories. Complex index number

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formulas are used to compute average aggregatedprice level changes each month relative to the
base comparison period. When the composition, size, or quality of an underlying
item changes substantially bls, economists makeadjustments to ensure price measures capture the pure
price change consumers face. This avoidsover or understating inflation due to product enhancements

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or degradations. Headline all items CPI, along with breakdowns by spending category,
are published monthly about two weeks afterthe end of each reporting period. Both
monthly and annualized inflation rates are reportedbased on the index. The CPI utilizes
extensive data inputs coupled with intricate indexmethodology to quantify average price changes in a

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rigorous, nationally representative manner. Whatis the difference between CPI and PCE inflation?
The Consumer Price Index outlined above playsa very similar economic role to the
Personal Consumption Expenditures PCE price index preferredby the Federal Reserve. Both aim to
provide key gages on consumer inflation.The most notable differences between CPI and PCE

(04:54):
include CPI tracks a fixed basket ofgoods, focusing on out of pocket perchase,
while PCE covers total expenditures across thewhole domestic economy, including imputed rents
and payments made by third parties likeemployers or government programs. CPI category weights
are based on consumer surveys, whilePCE weights derive inherently from actual recorded personal

(05:16):
consumption totals in the national accounts.PCE calculations make hedonic adjustments for item substitutions
and technological changes, affecting quality overtime. CPI only adjusts prices for direct
specification changes to the sampled products.Due to these CPI limitations around scope weighting
and quality accounting, PCE inflation reportsslightly lower numbers than CPI, typically running

(05:44):
about zero point three percentage points lesson an annual basis. Which inflation measure
does the FED use for policy?As noted in the PCE overview, the
Federal Reserve changed its formal inflation targetto the PCE Price Index in two thousand
twelve, given perceived technical advantages forcentral bank policy making. However, CPI

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still offers value for FED analysis fora few reasons. One value as cross
check, CPI serves as a supplementalgauge to complement PCE based inflation projections and
readings when assessing price dynamics. Twovisibility to households. While PCE is superior
for policy, CPI inflation rates tendto resonate better with average consumers given the

(06:30):
retail market basket focus. Three limitationsof core PCE. Core PCE that excludes
food and energy can miss near terminflation spikes, consumers feel acutely. CPI
shows emerging pressures faster, so theFed examines both indicators, emphasizing PCE,
aligning decisions to their overall economic objectives, but still closely monitoring CPI trends to

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tune into consumer perspectives. Why doesCPI inflation matter for consumers beyond policymakers.
Consumer price index changes directly impact averagehouseholds in multiple ways, including one cost
of living in wage growth impacts.CPI provides the most visible signal on how

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everyday retail prices are changing. Fortypical out of pocket spending categories like food,
gas, and rent, Rapidly risingprices quickly diminish real wage growth and
consumer purchasing power to indexation for governmenttransfers. CPI metrics determine annual inflation adjustment
for social security, retirement benefits,federal poverty thresholds, food assistance programs,

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and more. These transfers lose buyingpower if CPI understates true inflation. Three
Personal finance planning households refer to trailingoverall CPI and category specific indexes as benchmarks
for family budgeting and saving investment decisions, factoring expectations for future inflation. CPI

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inflation directly feeds into consumer prices,incomes, and financial plans, making it
a vital real world economic indicator forindividual Americans. What level of inflation is
considered optimal, mainstream economists, includingFED policymakers, typically cite two percent annual
CPI inflation as the sweet spot,balancing multiple economic objectives. At moderate two

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percent inflation, consumer spending remains supportedfrom slow income boosts, businesses retain sufficient
pricing power, and investment returns.Negative effects of inflation remain muted. However,
the FED does allow inflation to runmoderately above or below two percent at
times to accommodate economic shocks or recoverfrom recessions. Generally, CPI between one

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percent to three percent is still consideredhealthy As long as expectations don't drift too
high or low for prolonged periods,core inflation persists near two percent over time,
remains the fed's goal. What factorsinfluence changes in consumer price inflation?

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Many interacting economic forces combined together togenerate movements in consumer price index inflation rates.
Core factors that exert influence on CPIincreases include one business input costs as
wages, raw materials, transportation andfinancing costs rise producers pass higher prices to
consumers, which directly impact CPI.Two supplied disruptions adverse weather affecting crops,

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factory outages, commodity shortages, orglobal conflicts choking supply availability make goods scarcer
for purchase, driving prices upward.Three strength of consumer demand. When household
expenditures grow robustly weekly, the increaseddecreased consumption of limited goods adds pressure,
forcing prices higher. Lower captured inCPI changes. Four Import export conditions with

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a weaker dollar exchange rate, makingforeign products materi aerials more expensive for US
firms and consumers. Plus tariffs constrictingtrade input costs rise faster transmitting to retail
prices. Five inflation expectations. Ifconsumers and businesses expect sustained higher future inflation,
it gets built into negotiated pay settlementsand retail prices independent of other factors,

(10:20):
perpetuating rising CPI six productivity levels.When technological improvements and worker efficiencies accelerate,
firms can meet rising demand with lesslabor input and margin compression, keeping
retail prices more stable. Dynamic interplaybetween these core economic factors generates the ups
and downs observed in headline CPI inflationover time, from month to month and

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year to year. No single driverdictates changes. What are recent CPI inflation
rates and projections. According to latestdata published by the Bureau of Labor Statistics,
the headline All Items Consumer Price Indexshowed plus six point four percent year
over year inflation as of December twentytwenty two. That remains well above the

(11:05):
fed's targeted two percent expectation for pricestability. Current CPI sacks PI yeast six
point four percent, trending down fromforty year highs above plus nine percent in
mid twenty twenty two, but stillrunning triple underlying levels from pre pandemic years
of sub two percent readings, drivingthe stubbornly high inflation are spillover effects from

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supply chain breakdowns, soaring food slashenergy costs, and red hot demands still
outpacing constrained output and services capacity.Currently. Per latest Federal Reserve Medium projections,
FOMC members expect to reduce CPI inflationdown to plus three point five percent
by end of twenty twenty three andcloser to plus plus two point five percent

(11:48):
through twenty twenty four via monetary policytightening measures cooling economic growth. The trajectory
aligns with consumer surveys showing declining longerterm inflation fears. Achieving consistent two percent
inflation rates absent major negative shocks remainsthe fed's top priority over at least the
next twelve to twenty four months,according to recent communications and most economist expectations.

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How does CPI inflation compare historically?The adjacent CPI graph provides historical context
depicting headline CPI index levels and yearover year inflation rates. Back to two
thousand. Through the nineteen nineties andmid two thousands, CPI inflation averaged around
plus two point five percent, modestlyabove today's plus two point zero percent FED

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target. Formally adopted in twenty twelve, but still largely consistent with price stability.
The global financial crisis sparked severe demandcontraction in two thousand and eight two
thousand and nine. This pushed CPIinflation plummeting well below zero, temporarily into
outright deflationary territory, before rebounding outsidesingular crisis periods. CPI inflation across the

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Passcord century aligned reasonably close to theFed's comfort zone between one percent and three
percent, avoiding any runaway inflation orentrenched deflation over extended periods. While the
current six percent TuS rates stand outsharply. CPI inflation has so far moved
back down following crisis spikes in thelast decade. The test remains whether the

(13:20):
Fed can re anchor consumer inflation expectationsback near two percent as tightening policies take
hold into twenty twenty three, twentytwenty four, and beyond