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What is the purpose of a CPI index?

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Consumer price indexes, or CPIs, are used to measure the level of inflation in an economy and to help determine the real rather than nominal change in the value of wages, prices and other economic measures. A CPI measures the percentage change in prices for a bundle of common consumer goods and services that represent the overall cost of living, and it weighs each item in proportion to the amount consumers normally spend on it.

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The U.S. government never revises its indexes because it uses the index measures to track changes in the cost of living and to make changes to Social Security payments and other forms of government assistance as well as to change tax brackets. The government also prices many of its contracts and other programs according to the CPI, creating significant complexity in the event of any changes.

The Federal Reserve uses inflation to determine its interest rate policy, while many banks and corporations use it as the basis for investing and hedging decisions. The rate of inflation also influences the present value of fixed bond payments, helping to drive bond pricing and returns. Some bonds provide payments pegged to the CPI to provide inflation protection. Inflation also affects retirees' fixed pension or reverse mortgage values.

The U.S. Bureau of Labor Statistics maintains two indexes: the CPI-U for standard urban families and the CPI-W for urban wage and clerical workers. The latter, which economists more commonly reference, is apportioned with 15.6 percent of its total value coming from the cost of food and beverages, 40.9 percent from housing costs including utilities, and 4.2 percent on apparel and services. Various transportation costs account for 17.3 percent, 6 percent relates to health expenditures, 5.9 percent stems from recreation, and 5.8 percent is for education and communication. The remaining 4.4 percent accounts for miscellaneous costs.

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