Consumer Price Index
The Consumer Price Index (or “CPI”) is a popular method of measuring inflation or (less commonly) deflation. According to my beloved investopedia.com, it works like this:
The Bureau of Labor Statistics selects a “basket” (grouping) of goods and services frequently used by average people. This can include things like food items, housing transportation costs, apparel, tuition, and medical care costs. The items are taken on a weighted average to produce a number which is then tracked for upward or downward movement.
When I first heard of the CPI I thought it was a cost-of-living indicator. Not so! It is actually a tool for measuring inflation and deflation. Increases in the CPI provide insight into inflation rates. Likewise, decreases in the CPI indicate deflation. Those decreases are rare, though we recently saw one in the total annual CPI from 2008 - 2009. Check out this table for a month-by-month breakdown of the CPI over the past ten years.
