The Consumer Price Index (CPI) is a measure of the average price change over time for a fixed basket of goods and services purchased by households. The Bureau of Labor Statistics (BLS) releases CPI monthly; it's the most widely cited measure of inflation in the U.S.
How It Works
Imagine a fixed basket of 300 items: groceries, gasoline, rent, utilities, healthcare, entertainment. In January, this basket costs $1,000. In December, the same basket costs $1,032. CPI rose 3.2% year-over-year.
This 3.2% inflation means $100 of purchasing power a year ago buys only $96.80 worth today.
Real-World Impact
On a $50,000 salary:
- Year 1: Buys goods worth $50,000
- Year 2 with 3% inflation: Same salary buys goods worth $48,540
- Annual purchasing power loss: $1,460
Over a 30-year career with 3% average inflation, purchasing power erodes 60%.
Central Bank Response
The Federal Reserve uses CPI to guide interest rate policy. When CPI rises above 2% (the Fed's target), they raise interest rates to slow the economy and reduce inflation. When CPI falls below 2%, they cut rates to stimulate.
Headline vs. Core CPI
Headline CPI: Includes volatile food and energy prices. Can spike due to temporary supply disruptions (hurricanes, geopolitical events).
Core CPI: Excludes food and energy, showing underlying price trends. More stable, preferred by the Fed for policy.
When headline CPI spikes 5% but core CPI is 3%, the gap likely reflects temporary commodity volatility, not persistent inflation.
