Consumer Price Index and the Inflation Rate

The Consumer Price Index measure of inflation, how it's calculated, and why it's important.

Mar 1, 2014 at 11:55AM

Every month, the Bureau of Labor Statistics reports the Consumer Price Index, or CPI, the most widely used measure of inflation. The CPI is produced by following the monthly changes in the prices paid by urban consumers for a representative basket of goods and services. While it may not be the best measure of the inflation rate, the consumer price index is tied to numerous rates that makes it important for investors to follow.

What is inflation?
Inflation is the level of decline in the purchasing power of money as the prices of goods and services increase. For example, if you live in Venezuela, where the inflation rate is 56%, you need 56% more money than you did a year ago to buy the same basket of goods and services. In the U.S., the consumer price index is just one method to track the inflation rate. The Federal Reserve has recently put more emphasis on the personal consumption expenditures inflation rate, which you can read about here.

Consumer price index
The Consumer Price Index for All Urban Consumers, or CPI-U, is commonly referred to as the consumer price index, or CPI. The CPI is meant as an approximation for the spending patterns for all urban consumers, who represent 87% of the total U.S. population. The CPI tracks a basket of goods and services that is determined by survey results provided by roughly 7,000 families from around the country. The basket is updated every two years based on the survey results.

The Bureau of Labor Statistics reports the consumer price index in the middle of the month; a full schedule of upcoming releases for the consumer price index can be found here. The Federal Reserve generally targets inflation of 2%. Lately, though, inflation has been running below the Fed's target.

US Inflation Rate Chart

U.S. Inflation Rate data by YCharts.

While inflation hasn't been much of an issue in the U.S. in the past decade, in other parts of the world it is a major issue. Venezuela is a prime example: The value of the country's currency is spiraling downward.



Inflation is rising so quickly in Venezuela that you hear stories of shopkeepers not bothering to put prices on goods, instead having customers ask about the price of each item.

In the U.S., the consumer price index is especially important, as it is tied to so many different financial products, notably:

  1. Social Security. Since 1975, Social Security benefits have been adjusted for inflation, though they're adjusted using the CPI-W instead of the standard CPI-U. The CPI-W is the Consumer Price Index for Urban Wage Earners, and it differs slightly from the CPI-U in that it only includes survey samples paid by households where people are actively working.
  2. Treasury inflation-protected securities. Treasury inflation-protected securities are bonds that pay a fixed coupon. However, principal adjusts upward with inflation and downward with deflation.

How to protect yourself
Education is half the battle -- learning about the factors affecting markets and how they impact you personally. The other half of the battle is how you invest both your time and money.

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Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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