The Consumer Price Index (CPI) is a measure of the weighted average change in price that urban households in the United States pay for a sample basket of consumer goods and services. Goods and services represented in the CPI can be broken into eight major groups: food and beverages, housing, transportation, medical care, recreation, education and communication and "other." Each month, the U.S. Bureau of Labor Statistics (BLS) calculates the index by averaging price changes for each item in the basket.
The CPI is designed to reflect the purchasing patterns for "all urban consumers" as well as urban wage earners and clerical workers, according to BLS documents. The urban consumer group represents approximately 89 percent of the total U.S. population and includes professionals, the self-employed, the poor, the unemployed and retired citizens. The CPI does not include the spending patterns of people living in rural nonmetropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals.
The CPI is one of the most frequently used indictors by economists, government officials, business analysts and others for identifying trends in U.S. inflation or deflation. The U.S. president, Congress and Federal Reserve often set their fiscal policies based on data from the CPI and other indexes, including the Producer Price Index (PPI), a measure of the average change in prices that domestic producers of goods receive for their products.
The CPI is frequently used to adjust charges for rents, as well as wages, alimony, child support and other factors that changes in the cost of living might affect. However, the CPI does not take into account some factors that affect cost-of-living and consumer well-being, including health, water quality and safety.
The BLS breaks the CPI into four major census regions (Northeast, Midwest, South and West) and three metropolitan areas (Chicago-Gary-Kenosha, Los Angeles-Riverside-Orange County and New York-Northern New Jersey-Long Island. The bureau provides further details on 11 additional metro areas every other month and an additional 13 metro areas twice a year.