Explaining the Consumer Price Index

Source: Adam Weber and John Peterson, Economic and Budget Issue Brief, Congressional Budget Office, June 20, 2007

The consumer price index for all urban consumers (CPI-U) is the best-known official measure of inflation. Published monthly by the federal Bureau of Labor Statistics (BLS), the CPI-U tries to approximate changes in the cost of living–that is, changes in the cost of maintaining a constant standard of living from one month to the next. To construct the CPI-U, BLS surveys the prices of thousands of goods and services (the index has more than 200 categories of items) in 38 regions, averaging the results to form a nationwide estimate of inflation. Over the past five years, the cost of living, as measured by the CPI-U, has varied but, on average, has risen by about 2-3/4 percent per year.

The purpose of this brief is to explain some of the methods used to construct the CPI-U and why, in some cases, the index’s estimates of inflation may differ from consumers’ perceptions of how much prices are rising.2 The brief focuses on six aspects of the CPI-U’s construction: averaging regional price indexes to create a nationwide index; estimating the expenditure weights that BLS assigns to the major categories of prices in the CPI-U to account for the categories’ relative importance; allowing for shifts in relative prices, a phenomenon known as economic substitution; adjusting for changes in the quality of various goods and services; measuring prices for medical care; and measuring prices for shelter.

Leave a Reply