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SIMPLE EXPLANATION OF INFLATION AND CPI

What is Inflation?

Inflation is an increase in the overall level of prices. Because rising prices reduce the buying power of money, inflation can also be defined as a decline in the value of money.

What is the Rate of Inflation?

The rate of inflation is a measure of how fast prices are rising. It is computed as the percentage increase in the level of prices between two time periods.

What is the Consumer Price Index (CPI)?

The consumer price index (CPI) is the most widely used measure of consumer price inflation. The CPI measures the average change over time in the prices paid by urban consumers for goods and services. The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor collects the CPI price information and calculates the CPI statistics.

What are the CPI-U and the CPI-W?

BLS measures the CPI for two population groups:

  1. All Urban Consumers (CPI-U)
  2. Urban Wage and Clerical Workers (CPI-W)

The CPI-U measures consumer price inflation for all U.S. residents of urban areas, which accounts for about 87 percent of the U.S. population. The CPI-W measures consumer price inflation for a subset of the CPI-U population: residents of urban areas who live in households that:

  • receive more than half of their income from clerical or wage occupations, and
  • have one earner employed for at least 37 weeks during the previous 12 months.

The CPI-W covers about 32 percent of the U.S. population.

The CPI-U is the most commonly used index because it has the broadest population coverage. However, the CPI-W is used sometimes to make cost-of-living adjustments for labor contracts.

How is the CPI index used to measure price change?

The CPI measures the average change over time in the prices paid by urban consumers for a representative selection of consumer goods and services. The selection of goods and services (commonly referred to as the "market basket") is based upon actual consumer purchasing patterns, which are determined from a survey of consumer expenditures. Goods and services in the market basket are weighted according to the share they constitute of total consumer spending. The major expenditure categories are:

  • Food and beverages
  • Housing
  • Apparel
  • Transportation
  • Medical care
  • Recreation
  • Education and communication
  • Other goods and services

How often are CPI data published?

U.S. CPI data is published each month; in addition, annual CPI data is published each year.

         See: Our main COLA information page

 

 and: What is the CPI, how is it figured, and why the heck do I care??

 and: Does the CPI reflect what Seniors must actually spend?

 and: Explanation of exactly how the 2009 COLA was figured

 and  He supports fair Social Security Increases to Reflect Seniors'

        Higher Costs of Living

 

Parts are extracted from an article on Seattle.gov

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