Understanding CPI and Your Money

According to the U.S. Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Okay, great. What does that actually mean? The CPI can be complicated, so here are some answers to questions about the formula.

How is the CPI Created?

The CPI is created when the BLS gathers about 80,000 price quotes each month from about 23,000 retail and service companies. The categories the prices are picked from include the following:

• Housing
• Commodities
• Food
• Energy
• Health Care
• Transportation
• Education
• Other Expenses

Is CPI the Same as Inflation?

No. CPI is not the same as inflation. In fact, the CPI used to measure inflation. The CPI is an economic indicator that is most commonly used by policymakers for identifying periods of inflation. The Fed uses the CPI to see if they need to make changes in order to prevent inflation.

How Does CPI Impact Me?

The CPI can impact you in a few ways. If the CPI goes up and agencies make changes to prevent inflation, mortgage rates could increase. A higher the CPI might also point toward inflation, which means prices go up, and that decreases your spending power. It is worth loosely monitoring the CPI, but it’s not something you should worry about too much. Keep an eye on it so you can see how the economy is trending.

Original article by Chris O'Shea and adapted in partnership with SavvyMoney.