Consumer Price Index

I'm sure that many of you have heard the Consumer Price Index (CPI) mentioned in financial publications or on TV shows (i.e. shows running on CNBC). Basically, the CPI takes a look at the economy and reports what it costs to pay for food, housing, transportation, medical care, clothing, entertainment, and other basic expenses.The CPI is figured each month and is compared to the previous month. It has two jobs: showing economic trends and influencing economic decisions.

Perhaps you are wondering what makes it so important. It's important because it affects the one place thing everyone has their mind on: their wallet. It is also the standard for comparison for adjusting Social Security payments and determining cost-of-living increases in pensions and wages.The Consumer Price Index is figured by the Bureau of Labor Statistics each month. They figure it by shopping for goods and services that pertain to the average American consumer (like you and I). The Bureau then reports the changes in the total bill from month to month and year to year. Occasionally, the components (housing, food, transportation, etc...) are adjusted to reflect changes in lifestyle.

The CPI does not evaluate the quality of products and does not measure the constantly changing taste of Americans. However, this number gives us an easy way to determine if the cost of living in the US is going up or down. If it's going up, it could mean inflation is on the rise. But we'll cover that in another article.