Glossary
Consumer Price Index (CPI)
A monthly BLS measure of the average change in prices urban consumers pay for a basket of goods and services; the main US inflation gauge.
The Consumer Price Index is the Bureau of Labor Statistics' monthly measure of how the prices paid by urban households change over time, tracked through a fixed basket of goods and services from groceries and rent to car insurance and airfares. Its year-over-year change is the most widely quoted figure for US Inflation, and the release can move bond yields and stocks within seconds.
How it is built
BLS field staff and data feeds collect prices for tens of thousands of items each month. Each category is weighted by how much consumers spend on it; housing (shelter) is the largest single component, at roughly a third of the index. The headline series, CPI-U, covers urban consumers, who make up more than 90% of the population, and is set so that the 1982–84 average equals 100.
Headline, core and the Fed
Headline CPI includes everything. Core CPI strips out food and energy, whose prices swing with weather and oil markets, to show the underlying trend. Markets react to both, often more to core.
Despite its fame, CPI is not the Fed's official target. The 2% goal is defined on the PCE price index, which uses a broader scope and updates its weights as people switch between products, so it usually runs a little below CPI. A related series, CPI-W, sets the annual cost-of-living adjustment for Social Security, and CPI-U drives the principal of TIPS bonds and the inflation indexing of many tax brackets.