The Consumer Price Index (CPI) is the most commonly cited measure of inflation in the United States. This lesson explains what the CPI measures and how statisticians build it from prices and household spending data.
The CPI tracks changes over time in the prices of goods and services typically purchased by households. The U.S. Bureau of Labor Statistics (BLS) produces the index. Its basket is designed to represent the spending patterns of an average household; it cannot exactly represent every individual or family.
All flashcards
Consumer Price Index (CPI)
An index tracking changes over time in prices of goods and services typically purchased by households.
Spending weights
Values based on household spending shares that determine how much items influence an overall price index.
Substitution bias
Overstatement of cost-of-living increases when a fixed basket fails to reflect consumers switching from relatively more expensive goods.
Core inflation
An inflation measure that commonly excludes volatile food and energy prices to help reveal persistent trends.
GDP deflator
A price measure covering goods and services included in GDP, with coverage that changes with current-year output.
Quiz questions
Which U.S. agency produces the Consumer Price Index?Answer: The U.S. Bureau of Labor Statistics
Why do economists use a core inflation measure that commonly excludes food and energy prices?Answer: To help identify persistent price trends without temporary volatility dominating the signal
Why can a fixed-basket price index overstate the rise in consumers’ true cost of living when relative prices change?Answer: It does not account for consumers substituting away from goods that become relatively more expensive
How does the GDP deflator’s coverage differ from the CPI basket?Answer: It reflects the composition of current-year GDP rather than a fixed household-purchase basket
What does the Producer Price Index primarily measure?Answer: Prices producers pay for supplies and inputs
Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.