The Consumer Price Index (CPI) helps in tracking the monthly fluctuations in prices that are paid by the consumers in the United States. The Consumer Price Index is calculated by the Bureau of Labour Statistics (BLS) as a weighted average of prices for a basket of goods and services that reflects the overall consumer spending in the United States. The Consumer Price Index is thus widely recognised as one of the key indicators of inflation as well as deflation. The CPI report thus utilises a distinct survey of the methodology, its price samples, as well as index weights that are compared to the Producer Price Index (PPI), which helps in tracking the fluctuations in the prices received by U.S. producers of goods and services.
The Consumer Price Index is widely in use by the financial market participants for evaluating the inflation and by the Federal Reserve for adjusting its monetary policy. The Consumer Price Index is one of the crucial tools for businesses as well as consumers for making informed economic decisions. Thus, understanding the significance of CPI in pay negotiations is essential, as it helps in indicating the shifts in consumers' purchasing power.
For calculating the Consumer Price Index (CPI), the Bureau of Labour Statistics takes a sample of 80,000 prices every month. Thus, the index for each product or service is then weighed in the proportion to its percentage of the recent consumer expenditure in order for determining the overall changes in the prices. In addition, to the calculation taken into account the substitution impact, that occurs when the customers move their spending away from the items that are increasing in the price compared to one another. Thus, changes in product quality as well as features are also taken into account while calculating the Consumer Price Index.
CPI = (Cost of basket in current period / Cost of basket in base period) * 100
Base Year (2020) Basket:
Current Year (2024) Basket:
