by Amy Lillard
We know the numbers are important, but how important? And what do they really mean? In a continuing series, we examine major economic reports, answering common questions and pinpointing the true meaning behind the figures.
May 30, 2007 - Inflation is the buzzword. We all know that prices have been inflated over time, that a decent salary in 1980 would be ineffective today. But what really goes into inflation, and how is it measured?
It starts with a measurement called the Consumer Price Index, or CPI. This is a measure of the average change over time in the prices paid by urban consumers for typical goods and services. The CPI, once determined, affects us because of how it is used. It directly influences adjusted dollar values, and indicates the health of our economy.
So what goes into the CPI? This figure reflects spending patterns for two population groups: all urban consumers (approximately 87 percent of the US population), and urban wage earners and clerical workers. The All Urban consumer group includes professionals, self-employed, poor, unemployed, retired, and the urban wage earners and clerical workers. Not included in the CPI are the spending patterns of rural populations, farm families, persons in the Armed Forces, and those in institutions (prisons and mental hospitals).
The CPI is often called a cost-of-living index, but in fact differs in major ways. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain standard of living. The CPI and a cost-of-living index would reflect changes in the prices of goods and services, but a complete cost-of-living index would go beyond. It would take into account changes including government, environment, education, and safety factors that affect wellbeing.
The CPI is determined based on a Consumer Expenditure Survey, in which approximately 10,000 families across the country provided information on their spending habits in quarterly interviews. Another 7,500 families keep diaries listing their precise purchases over a set period. The CPI covers all goods and services purchased for consumption, arranged in eight major groups:
The CPI includes sales and excise taxes, but excludes income and Social Security taxes. It does not include investment items. Statisticians with the Census Bureau and the Bureau of Labor Statistics gather and compile this date to form the CPI.
The CPI measures inflation, then, as experienced by consumers in their day-to-day expenses. Other measures reflect inflation in different ways:
The best measure of inflation depends on the purpose of the data. The CPI is the best piece of information to adjust payments to consumers, as well as to translate retails and sales and earnings into real or inflation-free dollars. The CPI is often reported in terms of increase or decrease. For example, the All Item U.S. City Average CPI was +0.6 percent in April 2007. This represents a +2.6 percent increase since April of 2006.
For more information, view www.bls.gov/cpi/home.htm.