The Consumer Price Index (CPI) is determined by tracking price changes in a market basket of consumer goods and services over a period of time. The Bureau of Labor Statistics releases several different consumer price indexes on a monthly basis, but the CPI most frequently cited by the media is the Consumer Price Index for All Urban Consumers (CPI-U).

The CPI market basket was created based on surveys of consumer spending habits. The Bureau of Labor Statistics used the surveys to select more than 200 categories of goods and services to monitor. The CPI increases or decreases based on average price movements inside the market basket.

Each month, economic assistants from the Bureau of Labor Statistics (BLS) either visit or call retail stores, professional offices, rental units and other establishments across the country to collect price data for the CPI market basket. After the data has been collected, commodity specialists will examine it for accuracy and make statistical adjustments based on any given item's value.

The CPI is considered by many to be a benchmark indicator for inflation in the U.S. economy. In fact, reported inflation rates are often simply percentage changes in the CPI-U.

Others, however, question how useful the CPI actually is. The Bureau of Labor Statistics has revised the methodology used to calculate CPI several times, usually resulting in lower reported increases in the price level. Consequently, some believe the CPI (purposefully or otherwise) understates the impact of inflation. (For related reading, see "Why the Consumer Price Index Is Controversial.")

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  3. What is the relationship between the PPI and the CPI?

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  4. Which economic factors most affect the demand for consumer goods?

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  5. How is the cost of living index calculated?

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