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A Primer on the Consumer Price Index

From the socks on your feet to the gas in your car to the bill for your phone calls, the Consumer Price Index has taken it into account. Learn more about the index and how it impacts your life.

WHAT IS IT? When you think of the Consumer Price Index, or CPI, think "change in price." The CPI is a statistical measure of the average change in price that urban consumers pay for goods and services.

WHAT DOES IT AFFECT? The CPI is a widely used measure of inflation. It's sometimes viewed as an indicator of the effectiveness of government economic policy. It factors into business and labor decisions nationwide.

The CPI is also used to adjust sets of economic information for price changes and to translate these economic series into inflation-free dollars. For instance, it can be used to calculate the purchasing power of a dollar at different dates. The CPI is what allows us to calculate, for example, that, back in 1913, $5 in your pocket would have bought you as much as $102 would today.

WHY CARE? The CPI affects the incomes of millions of people across the country, including Social Security recipients, food stamp recipients, and military and federal civil service retirees. Changes in the CPI can affect the cost of school lunches.

HOW ARE CPI PRICES COLLECTED? Each month, data collectors for the Bureau of Labor Statistics visit or call thousands of retail stores, service establishments, rental units and doctors' offices all over the United States, gathering information on the items the CPI tracks. Prices for about 80,000 items are recorded each month, representing a scientifically selective sample of the prices consumers pay.

WHAT DOES IT INCLUDE? The CPI is based on what residents of urban or metropolitan areas pay for goods and services. The CPI covers eight major groups of goods and services, which include more than 200 item categories. Examples include rent and bedroom furniture (housing), sweaters and jewelry (apparel) and airline fares (transportation).

It also covers government-charged fees such as water and sewage charges, auto registration fees and vehicle tolls. It includes sales and excise taxes.

WHAT DOES IT EXCLUDE? The CPI does not include the expenditures of rural, non-metropolitan residents.

It does not include investment items related to savings, such as stocks, bonds, real estate, and life insurance, nor taxes -- such as income and Social Security taxes -- that are not directly associated with the purchase of consumer goods and services.

WHAT IS CORE CPI? Core CPI refers to the CPI measure excluding food and energy. These groupings are left out because, historically, they have been highly volatile. For instance, food prices can change because of supply disruptions from drought. Energy prices can dramatically change due to OPEC-led cutbacks in production.

Source: U.S. Bureau of Labor Statistics

Research by Melissa Pachikara

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