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.

Venezuela

Source: TradingEconomics.com.

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.

Importance
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.

Become an Investor Today
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet, those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important, and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers