The CPI is the Consumer Price Index, a measurement of prices for a range of consumer products. It is calculated in urban areas and provides a fairly good look at how much inflation has occurred in the country. This type of index is widely used and similar in most ways to a cost of living index.
A CPI can utilize either a base year or a chained system. Using a base year system, it takes a breakdown of spending areas from a specific year and weights each accordingly for subsequent years. As an example, if in 1992 the breakdown of spending was 15% food, 10% recreation, 25% housing, 5% apparel, 15% transportation, 10% medical care, 5% education and 15% other, then these same weightings would be used in all subsequent years, whether or not the actual distribution was the same. A chained system takes a new measure of weighting each year for each index. The index as released by the US Bureau of Labor Statistics includes both the traditional CPI for all Urban Consumers (CPI-U) and a Chained CPI for all Urban Consumers (C-CPI-U).
The CPI represents the majority of the US population, as it measures all urban consumers and their spending habits. This sector comprises 87% of Americans. In addition to the measurement of urban consumers, it also measures of a subset of this group. The CPI-W measures only those consumers who have half of their household income coming from wage or clerical occupations, and who have been employed for at least thirty-seven weeks during the previous year. This group comprises 32% of Americans.
The CPI's market basket is made up of over 200 categories in eight general groups: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. In addition to goods and services purchased through the consumer market, government-issued charges such as water fees, vehicle tolls, and registration fees are also included.
Each month, the Bureau of Labor Statistics conducts a survey of thousands of stores, rentals, doctors, and other service and goods providers. They track the prices of the goods and services reported by a sample group as being their top expenditures and collate this data into the CPI.
While there are many different methods of tracking inflation, all with their own benefits, the CPI has proven itself to be an ideal inflation marker for consumer purposes. By using it, the government can best determine how to adjust payments to consumers to help them meet their material needs.