Consumer Price Index CPI Explained: What It Is and How It’s Used

It also adjusts price data for changes in product quality and features. The weighting of the product and service categories in the CPI indexes corresponds to recent consumer spending patterns derived from a separate survey. The owners’ equivalent category models the rent equivalent for owner-occupied housing to properly reflect housing costs’ share of consumer spending. User fees and sales or excise taxes are included, while income taxes and the prices of investments such as stocks, bonds, or life insurance policies are not part of the CPI.

Airfares surged 4.9% on higher jet fuel costs after a string of declines. Hospital services rose 0.7%; car repairs, 1.1%; and auto insurance, 2.4%. Broadly, a core index of service prices that’s tied closely to wage growth and that the Fed is watching closely accelerated, rising 0.5%, according to High Frequency Economics.

Recap of September 2022 CPI

If that happens, it will likely dampen hopes that the central bank will ease up on continued interest rate hikes over the next several months. That means that the cost of borrowing will continue to increase for consumers, and things like auto financing, credit cards and other loans will get more expensive. So interpreting October’s CPI report will require looking beyond the topline numbers to examine trends for prices in food, shelter and other goods and services beyond energy. It’s those prices that are creeping up at a faster rate than the Fed wants to see and creates the fear that inflation could become a longer term problem for the U.S. economy. Two major categories to watch are food and shelter these carry large weights in CPI inflation calculations.

A higher CPI often means that a less stringent government policy is generally in place.
The U.S. Bureau of Labor Statistics (BLS) releases a monthly CPI report that includes statistics about how the prices of different goods and services change over the last month and the last 12-month period.
“We’re penciling in slower increases in January and February and March on that shorter lag,” he said.
The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI), which measures changes in the prices received by U.S. producers of goods and services.
This increase reflects a rise in crude-oil prices driven by supply concerns.

The upcoming October CPI report may help to start to resolve that apparent inconsistency. The main story for the two most recent CPI releases for the months of July and August has been that energy prices, such as gasoline costs, fell dramatically enough to keep a lid on prices overall. The U.S. is likely past peak U.S. inflation, but the Fed is concerned inflation won’t fall as fast as they would like.

How does raising rates lower inflation?

The fed funds rate range is currently at 4.25% to 4.5%, and the central bank has forecast a final high rate of 5.1% for this year. Economists are watching closely to see how much inflation related to services the money queen’s guide rises in CPI, since goods inflation is expected to continue to come down now that supply chains are operating more normally. Rental market data shows a slowing in rates, but the CPI has not yet reflected it.

Consumer Price Index Category Components

A higher-than-expected CPI could lead to turbulence in the market as traders reassess their expectations for the future of interest rates. Market sentiment is converging around the expectation that the Federal Reserve will refrain from raising interest rates in September. More recently, critics have claimed that adjustments for changes in product quality and features understate the CPI. The cost-of-living adjustments (COLAs) based on the CPI affect federal payments to the approximately 70 million Americans receiving Social Security and Supplemental Security Income (SSI) benefits. They also apply to federal pension payments, school lunch subsidies, and income tax brackets. Some strategists expect Fed officials to begin to sound more dovish and less at odds with the market view.

This measure offers a more stable reading on inflation because it strips out food and energy prices from the calculation. Prices of these goods tend to see sizable and unpredictable changes month to month that have little to do with consumer demand. The Fed’s next meeting is on September 19-20, so they will have an additional CPI reading from September 13 to feed into their interest rate decision.

The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. alphabet shares consumer spending. The pace of consumer inflation is expected to have fallen slightly in December from the prior month because of a sharp drop in gasoline and energy prices, but the annual rate is still likely to remain uncomfortably high.

For this reason, the CPI may not adequately reflect each individual’s experience in regard to costs and changes over time. CPI-W is used to adjust Social Security payments as well as other federal benefits and pensions for changes in the cost of living. It also shifts federal income tax brackets to ensure taxpayers aren’t subjected to a higher marginal rate as a result of inflation. The BLS collects about 80,000 prices monthly from some 23,000 retail and service establishments. Although the two CPI indexes calculated from the data both contain the word urban, the more broad-based and widely cited of the two covers 93% of the U.S. population.

The drop in home prices in late 2022 and early 2023 while mortgage costs rose relatively steeply becomes reflected in CPI figures, after a lag. In recent statements, Federal Reserve officials have largely downplayed the chances of an interest rate hike this month. However, the September and October CPI reports in combination will inform whether the Fed decides to make what might be a final increase in short-term rates on Nov. 1. The usual suspects—continued economic strength, a robust services sector, and a sturdy housing market—are keeping core inflation elevated, in Winograd’s view. For the August report, the CPI is expected to show a 3.6% increase in inflation from year-ago levels, according to FactSet.

What’s the difference between CPI and PPI?

In this article, experts weigh in and provide compelling insight into whether the Consumer Price Index is a valid metric for inflation. In response to higher-than-desired inflation rates via the CPI, the Fed adjusts the Fed funds rate. In the past two reports, shelter costs rose 0.4% on a monthly basis, a lower figure than many prior months which helped bring inflation down. That trend may continue, as lease costs in the CPI data follow home prices with a lag and generally U.S. home prices softened over late 2022 into early 2023 which likely still has to be picked up in the CPI series.

Here’s What The Fed Will Be Looking For In September’s CPI Data

The CPI is one of the most oft used techniques for measuring inflation all over the world, not just in the United States. Specific countries scrutinize different sets of data, but all employ a similar method. In the US, there has been contention surrounding the CPI for many years now.