The Consumer Price Index: Concepts, Construction, and Controversy
The Consumer Price Index (CPI) is commonly referred to as "the rate of inflation" or as "the cost of living in the United States." The Consumer Price Index is not, however, nor was it ever intended to be, either a definitive or an ideal measure of cost-of-living changes in the United States. Indeed, as a practical matter, such an ideal measure is probably impossible to construct. By its broadest definition, the CPI is a price guide for goods and services purchased by families living in the urban centers of the United States. More specifically, it is a price index for a "fixed basket" of goods and services generally purchased by moderate-income urban families and single persons during 1972-73. To imply that the CPI is a measure of price changes for all goods or for all consumers exaggerates the value of the index as an inflation barometer.
Despite its limitations as a cost-of-living indicator, the CPI remains the most popular and widely accepted measure of inflation in the domestic economy. Constructed by the Bureau of Labor Statistics (BLS), the CPI has been a timely and reliable price statistic for over 60 years. In the past decade, it has come into extensive use in collective-bargaining agreements and in the current indexing of social-security benefits. Consequently, the CPI ranks among the most influential economic statistics published; unfortunately, it is often misused. This Economic Commentary examines the construction of the Consumer Price Index and explores some of the inherent problems that have prompted the controversy surrounding its use in measuring inflation, particularly during periods of rapidly changing prices.
The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. The series editor is Tasia Hane. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit clevelandfed.org for updates.