The U.S. Consumer Price Index (CPI) measures the increase in the price level of a basket of goods and services consumed by most households. The Bureau of Labor Statistics (BLS) calculates and publishes the CPI monthly, tracking the change in average consumer goods prices over time. The list, according to the BLS, includes “food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living.”

　　The monthly CPI data tracks the extent to which prices have risen or fallen on a month-over-month basis, as well as on an annualized basis (i.e., over the previous 12 months). Although the BLS data includes seven tables—each containing many categories and components—two data points are widely followed:

　　Headline CPI represents all goods and services (some 94,000 of them) in a basket that attempts to mirror the expenditures of a typical household. Core CPI strips out food and energy prices, which can be volatile on a month-to-month basis and have an outsize effect on the headline number. Core CPI attempts to smooth out the volatility.The CPI is useful to the U.S. government as a barometer of the economy as it moves through cycles, and as a gauge for the effectiveness of economic policies. If inflation is too high or rising too fast, it can signal that the economy is overheating. If prices are falling, it’s a sign that the economy is slowing (see video).

　　Most developed nations track consumer prices over time. Indexes may differ among nations in terms of coverage, weightings, and collection methods, but there are some general characteristics that each consumer index includes. In the U.S., the CPI is one of several inflation indicators used by analysts and policymakers. Others include the Producer Price Index (PPI), which measures inflation at the manufacturing level, and the Personal Consumption Expenditures (PCE) price index, which takes its data from the Bureau of Economic Analysis’s gross domestic product (GDP) report.

　　Of the three inflation measures (CPI, PPI, and PCE), the Federal Reserve System’s board of governors tends to favor the PCE data when making monetary policy decisions.

　　Jayanthi Gopalakrishnan