The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living; the CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.

BREAKING DOWN 'Consumer Price Index - CPI'

The international Bureau of Labor Statistics reports the CPI on a monthly basis. Two types of CPIs are reported each time. The CPI-W measures the Consumer Price Index for Urban Wage Earners and Clerical Workers. The CPI-U is the Consumer Price Index for Urban Consumers.

The CPI is used by the president, Congress and Federal Reserve Board to formulate fiscal policies based on the monthly findings and how inflation or deflation is presented. Other inflation gauges are also used to decide the level of inflation.

What Is in the CPI?

The CPI statistics cover professionals, self-employed, poor, unemployed and retired people in the country. People not included in the report are non-metro populations, farm families, armed forces, and people serving in prison and those in mental hospitals.

The CPI represents the cost of a basket of goods and services across the country on a monthly basis. Those goods and services are broken into eight major groups:

• Food and beverages

• Housing

• Apparel

• Transportation

• Medical care

• Recreation

• Education and communication

• Other goods and services

CPI Regional Data

The Bureau of Labour Statistics also breaks down the CPI based on regions. Each month, the report is broken out into the four major Census regions: Northeast, Midwest, South and West. Three major metro areas are also broken out each month.

Along with the regional information provided each month, the Bureau of Labour Statistics also publishes reports for 11 additional metro areas every other month and an additional metro areas semi-annually. These reports cover areas with large populations and represent a particular region subset.

Basket of goods refers to a relatively fixed set of consumer products and services valued on an annual basis and used to track inflation in a specific market or country. The goods in the basket are often adjusted periodically to account for changes in consumer habits. The basket of goods is used primarily to calculate the Consumer Price Index.

BREAKING DOWN 'Basket Of Goods'

When conceptualizing a basket of goods, it is best to imagine a shopping basket. The basket contains everyday products such as food, clothing, furniture and a range of services. As the products in the basket increase or decrease in price, the overall value of the basket changes. Annually, the Bureau of Labour Statistics (BLS) collects data on the costs of the items in the basket of goods , and it compares the price of the basket to the previous year. The resulting ratio is the CPI.

How Does the CPI Relate to Inflation

Although the CPI is often conflated with inflation, it only measures inflation as experienced by consumers. However, it is not the only indicator of the level of inflation. The Producer Price Index measures inflation in the production process, and the Employment Cost Index measures it in the labour market. The International Price Program shows inflation for imports and exports, while the Gross Domestic Product Deflator includes inflation experienced by individuals, governments and other institutions.

A measure that examines the changes in the price of a basket of goods and services purchased by urban consumers. The urban consumer population is deemed by many as a better representative measure of the general public because most of the country's population lives in highly populated areas, which represent close to 90% of the total population.

BREAKING DOWN 'Consumer Price Index For All Urban Consumers (CPI-U)'

CPI is the most frequently used statistic for identifying inflation or deflation. The CPI-U only considers the prices paid for goods and services by those that live in urban areas. Rising CPI-U figures means that the prices of goods/services within the urban population are becoming more expensive and can be a sign of rising inflation.

All variants of the CPI are similar to cost of living indexes as they assess prices in the market based on the goods and services needed to achieve a given standard of living. Different measures of CPI differ from cost of living indexes because they do not account for changes in other facets of standard of living, such as changes in environmental factors.

A market basket is a subset of products or financial securities that is designed to mimic the performance of an overall market.

For investors, the market basket is the principal idea behind index funds, which are essentially a broad sample of stocks, bonds or other securities in the market; this provides investors with a benchmark against which to compare their investment returns.

Another popular market basket relates to the Consumer Price Index (CPI), which tracks a variety of consumer goods and looks at the price levels of consumer products, providing an estimate for inflation.

BREAKING DOWN 'Market Basket'

A market basket refers to a permanent mix of goods and services that are consistently purchased and sold throughout an economic system. Economists, politicians and financial analysts use a market basket to track price changes over time and determine inflation levels.