1. Defining the Basket:
* Survey: The Bureau of Labor Statistics (BLS) conducts surveys to determine the typical spending patterns of urban consumers. This identifies the goods and services that make up the "basket" used for CPI calculation.
* Categories: The basket includes various categories like food, housing, transportation, medical care, education, recreation, and more.
* Weights: Each item in the basket is assigned a weight based on its importance in the overall spending of consumers. For example, housing usually has a much higher weight than, say, entertainment.
2. Price Collection:
* Price Collectors: The BLS employs price collectors who visit stores, check online prices, and gather information on the cost of items in the basket.
* Regularity: Price collection occurs on a regular basis, usually monthly.
* Specific Items: Price collectors track prices for specific items within each category. For instance, instead of "clothing," they might track the price of a specific type of shirt, jeans, or shoes.
3. Calculating the CPI:
* Base Period: The BLS establishes a base period, which is used as a reference point for price changes. The CPI for the base period is typically set to 100.
* Price Changes: The BLS compares the prices collected in the current period to those in the base period.
* Inflation Calculation: The percentage change in the CPI from the base period to the current period reflects the rate of inflation.
Example:
* Base Period: 2010 (CPI = 100)
* Current Period: 2023 (CPI = 120)
This means that the price of the goods and services in the CPI basket has increased by 20% since 2010.
Types of CPI:
There are several variations of the CPI, including:
* CPI-U: Measures price changes for all urban consumers.
* CPI-W: Measures price changes for urban wage earners and clerical workers.
* CPI for All Urban Consumers (CPI-U): The most commonly used version of the CPI.
* CPI for Urban Wage Earners and Clerical Workers (CPI-W): Used for tracking inflation in wage contracts.
Uses of the CPI:
* Inflation Tracking: The CPI is a key indicator of inflation in the economy.
* Economic Policy: The CPI provides data for policymakers to make decisions on interest rates, wages, and other economic variables.
* Cost of Living Adjustments: The CPI is used to adjust wages, pensions, and other payments to keep up with inflation.
* Consumer Spending: The CPI can provide insights into consumer spending patterns and trends.