The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
The CPI is one of the most popular measures of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI), which measures changes in the prices received by U.S. producers of goods and services.
How Is the Consumer Price Index (CPI) Used?
The CPI is widely used by financial market participants to gauge inflation and by the Federal Reserve to calibrate its monetary policy. Businesses and consumers also use the CPI to make informed economic decisions. Since CPI measures the change in consumers’ purchasing power, it is often a key factor in pay negotiations.
The Federal Reserve
The Fed uses CPI data to determine economic policy. With a target inflation rate of 2%, the Fed may enact expansionary monetary policy to stimulate the economy should market growth slow, or enact contractionary monetary policy should the economy (and therefore prices) grow too quickly. In response to higher-than-desired inflation rates via the CPI, the Fed adjusts the Fed funds rate.
Financial market prices are driven by countless factors. One such factor is the CPI, as reactionary Fed policies
directly impact economic growth, corporate profits, and consumer spending ability.
A higher CPI often means that a less stringent government policy is generally in place. This means that debt is often easier to obtain for cheaper and that individuals have greater spending capacity. On the other hand, lower or decreasing CPI may indicate that the government may ease policy that helps boost the economy.