What is a 'Basket Of Goods'?

A basket of goods refers to a 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 (CPI).

BREAKING DOWN 'Basket Of Goods'

A basket of goods in the economic sense contains everyday products such as food, clothing, furniture and a range of services. As the products in the basket increases or decreases in price, the overall value of the basket changes. Annually, the Bureau of Labor Statistics (BLS) collects data on the cost of the items in the basket and 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 inflation in the labor 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.

What Is in the Basket of Goods?

The basket of goods includes food and beverages such as cereal, milk and coffee. It also includes housing costs and bedroom furniture. Apparel, transportation expenses, medical care costs, and recreational expenses including pets, toys and admissions to museums also qualify. Finally, education and communication expenses round out the basket's contents, and the government also includes a few random items such as tobacco, haircuts and funerals.

How Does the Government Measure Prices in the Basket of Goods?

In the United States, the basket of goods primarily takes into account purchases made by urban consumers; thus, it reflects the prices approximately 87% of the country's residents face. In these areas, the CPI includes the spending habits of people who are self-employed, unemployed and retired. It includes the poor and the wealthy. However, it does not include people in many rural areas, farmers, people in the Armed Forces, or those in institutions such as prisons and mental hospitals.

To track the prices for the basket of goods, the government uses answers from quarterly consumer expenditure surveys completed by thousands of American families as well as spending diaries chronicling every purchase made by thousands of families over a two-week period. The BLS also contacts thousands of service establishments, retail stores, apartment blocks and doctor's clinics to inquire about the prices of their products and services.

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