The Consumer Price Index (CPI) refers to a measure of the average change over time in the price paid by urban households for a set of typical goods and services purchased and consumed by them. These goods and services can include food, housing, and medical care. Kavan Choksi points out that the CPI is produced by the U.S. Department of Labor, Bureau of Labor to represent a statistical estimate of inflation.

Kavan Choksi provides a brief overview of the uses of CPI

The Consumer Price Index reflects the buying habits of each of two population groups: residents of urban or metropolitan areas (CPI-U), and urban wage earners and clerical workers (CPI-W). The former group includes professionals and self-employed, poor, unemployed, as well as retired persons. The all-urban group represents around 89% percentage of the population of the United States. On the other hand, CPI-W represents around 28% of the total U.S. population and is part of the CPI-U.

The traditional Consumer Price Index for All Urban Consumers (CPI-U) and the newer Chained Consumer Price Index for All Urban Consumers (C-CPI-U) are used for measuring the price-change experience of the all-urban consumer group. Among these, the C-CPI-U better reflects a cost-of-living indicator as it considers how consumers change their spending patterns in response to price shifts.

The CPI-W is based on the expenditures of households included in the CPI-U definition that get more than half their income from clerical work. These households also have at least a single earner who has been employed for at least 37 weeks during the previous 12 months.

The Consumer Price Index is widely used as an economic gauge and a deflator of other economic series. It is also used to adjust dollar values. Here are a few specific examples of the uses of CPI:

  • When it comes to poverty, the Census Bureau uses the CPI for the purpose of adjusting the official poverty threshold, which represents the minimum income required to prevent poverty, for inflation annually.
  • Employers of more than 2 million workers, whose wages are linked to the CPI through collective bargaining agreements, use the index to adjust their earnings.
  • Additionally, the Social Security Administration utilizes the CPI-W to modify the benefits provided to Social Security beneficiaries and Supplemental Security Income (SSI) recipients.

The CPI and its elements are extensively employed in order to modify various economic indicators for price shifts and to convert these indicators into inflation-adjusted values. Common examples of indicators adjusted by the CPI include retail sales, hourly and weekly wages, and even components within the national income and product accounts. As Kavan Choksi says, one of the prominent uses of CPI is as a tool to deflate the consumer’s dollar value, thereby revealing its purchasing power. This measure helps assess how the value of goods and services a dollar can purchase changes over time.

Even though it is at times referred to as a cost-of-living index, the CPI differs in crucial ways from a complete index. After all, it does not take into consideration the changes in certain factors that affect consumer well-being but are difficult to quantify, like safety, health, water quality, and crime.