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What Is the Consumer Price Index (CPI)?
By Jason Fernando Updated March 22, 2026
Reviewed by Peter Westfall
Fact checked by Pete Rathburn
Definition
The Consumer Price Index (CPI) presents the percentage change in prices that consumers pay for goods and services.
Key Takeaways
The CPI measures the average change in prices paid by consumers over time and is a key measure of inflation.
The CPI is based on tens of thousands of price quotes collected monthly from businesses and housing units.
Policymakers, financial markets, businesses, and consumers use CPI to track inflation and make economic decisions.
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What Is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics (BLS), measures the monthly change in price for a representative basket of goods and services. These items can change over time.
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CPI is a weighted average of prices and is representative of aggregate U.S. consumer spending. It is used as a metric for inflation and deflation.
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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 paid by U.S. producers of goods and services.
Consumer Price Index
Investopedia / Katie Kerpel
Understanding the CPI
Data Collection
The BLS collects about 80,000 prices monthly from retail stores, service establishments, rental units, and doctors' offices.
The data compiled and used to track prices covers 93% of the U.S. population. User fees and sales or excise taxes are included in CPI while income taxes and the prices of investments such as stocks, bonds, or life insurance policies are not.
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Data Adjustments
The CPI accounts for substitution effects—consumers' tendency to shift spending away from products and product categories that have grown relatively more expensive with time.
It also adjusts price data for changes in product quality and features. The weighting of the product and service categories in the CPI indexes corresponds to recent consumer spending patterns derived from a separate survey.
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Shelter category prices are based on a survey of rental prices for 50,000 housing units. They are then used to calculate the rise in rental prices as well as owners' equivalents.
The owners' equivalent category models the rent equivalent for owner-occupied housing to properly reflect housing costs' share of consumer spending.
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Types of CPIs
The BLS publishes two CPI indexes each month. The Consumer Price Index for All Urban Consumers (CPI-U) represents approximately 90% of the U.S. population not living in remote rural areas.
It doesn't cover spending by people living in farm households, institutions, or on military bases. CPI-U is the basis of the widely reported CPI numbers that matter to financial markets.
The BLS also publishes the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W covers approximately 30% of the U.S. population living in households with income derived predominantly from clerical employment or jobs with an hourly wage.
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CPI-W is used to adjust Social Security payments as well as other federal benefits and pensions for changes in the cost of living.
It also shifts federal income tax brackets to ensure taxpayers aren't subjected to a higher marginal rate as a result of inflation.
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CPI-U Formula
The more common CPI-U calculation entails two primary formulas. The first is used to determine the current cost of the weighted average basket of products, while the second is used to analyze the year-over-year (YOY) change.
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To calculate the annual CPI, the BLS divides the current value of a specific basket of goods compared to one year ago:
Annual CPI
=
Value of Basket in Current Year
Value of Basket in Prior Year
×
1
0
0
Annual CPI=
Value of Basket in Prior Year
Value of Basket in Current Year
×100
The basket of goods and services used in the CPI calculation is a composite of popular items commonly purchased by Americans.
The weight of each component of the basket is in proportion to how they are sold.
The annual CPI is reported as a whole number, and the figure is often greater than 100, assuming current market prices are appreciating.
Then, the BLS uses the current year's CPI and the prior year's CPI to calculate the inflation rate.
Inflation Rate
=
New CPI
−
Prior CPI
Prior CPI
×
1
0
0
Inflation Rate=
Prior CPI
New CPI−Prior CPI
×100
The inflation rate can be calculated for a given month or annual period; in either case, the appropriate new and prior period must be selected.
The inflation rate is reported as a percentage and is often positive, indicating current market prices are appreciating.
The 8 Major Groups of the Consumer Price Index
Investopedia / Maddy Price
CPI Categories
The monthly CPI release from the BLS leads with the change from the prior month for the overall CPI-U as well as its key subcategories, along with the unadjusted change year-over-year.
The BLS' detailed tables show price changes for a variety of goods and services organized by eight umbrella spending categories.
Subcategories estimate price changes for everything from tomatoes and salad dressing to auto repairs and sporting events tickets. Price changes for each subcategory are provided with and without seasonal adjustment.
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BLS also publishes CPI data for U.S. regions, sub-regions, and major metropolitan areas. The metro data is subject to wider fluctuations and is useful mainly to identify price changes based on local conditions.
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The table below represents the CPI basket weighted distribution for food, energy, and all other items.
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Category weightings may change, depending on the speed at which prices are rising.
CPI Categories by Weight
Group Weight
Food 13.702%
Energy 6.325%
All Items Less Food & Energy 79.973%
Total 100%
Source: Bureau of Labor Statistics
Using the CPI
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 grow too quickly. In response to higher-than-desired inflation rates via the CPI, the Fed adjusts the Fed funds rate.
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COLAs: The cost-of-living adjustments (COLAs) based on the CPI affect federal payments to the many millions of Americans receiving Social Security and Supplemental Security Income (SSI) benefits. They also apply to federal pension payments, school lunch subsidies, and income tax brackets.
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Housing: Mortgage rates and long-term debt are often impacted by rates set by government agencies. As the CPI increases and the government enacts policy changes to slow inflation, rates often increase. Landlords may use CPI information to adequately assess what annual rent increases for renters should be.
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Financial markets: Financial markets closely watch the CPI because inflation influences Federal Reserve policy. If CPI is rising too quickly, the Federal Reserve may raise interest rates to slow inflation. If CPI is low or falling, the Federal Reserve may lower interest rates to stimulate economic growth. Changes in interest rates affect borrowing costs, consumer spending, business investment, and financial markets.
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Labor: The CPI and its components support changes in hourly or weekly earnings. Employees may turn to CPI reports when approaching their employers for a raise based on nationwide increases in labor rates as well as pricing. Some workers covered by collective bargaining agreements may have their contracts and wages tied to changes in CPI.
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Fast Fact
The BLS reports the CPI on a fixed, monthly basis at 8:30 a.m. Eastern time. A schedule of prior and future releases can be found on the BLS website.
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Explain It Like I'm Five
The Consumer Price Index (CPI) measures how prices change over time. It tracks the prices of everyday things people buy, like food, gas, rent, and clothes.
If the CPI goes up, it means prices are rising (inflation).
If the CPI goes down, it means prices are falling (deflation).
The government and businesses use CPI to gauge how expensive life is becoming and to inform economic decisions.
How Does the CPI Affect Unemployment Rates?
The Federal Reserve often balances inflation and unemployment when setting monetary policy. Policies that stimulate the economy can increase inflation, while policies that reduce inflation can slow the economy and increase unemployment.
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How Is the Consumer Price Index Used?
The CPI Index is an inflation indicator closely watched by policymakers and financial markets. A related CPI measure is used to calculate cost-of-living adjustments for federal benefit payments.
What Are Some Criticisms of the CPI?
The CPI-U measures inflation for urban consumers and may not reflect the experience of rural households or specific demographic groups. Because households have different spending patterns, inflation affects them differently. For example, education, healthcare, housing, and food costs may affect demographic and income groups differently. As a result, the CPI may not fully represent changes in the cost of living for every household.
The Bottom Line
The Consumer Price Index measures the average change in prices paid by consumers over time for a basket of goods and services. The index is calculated and published monthly by the Bureau of Labor Statistics.
It is a common measure of inflation, indicating the health and direction of the economy. It also serves in other capacities, notably to help make adjustments to certain income payments, such as Social Security and pensions for federal civil service retirees.
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