Consumer Price Index Our economy today uses economic indicators to figure out how the economy is doing and one of these indicators is the Consumer Price Index (CPI). The CPI is an inflation indicator that is calculated by the Bureau of Labor Statistics that they publish every month. The CPI is the most important inflation indicator in the US. The CPI is an estimation of price changes for a typical basket of food. It represents changes of all goods and services purchased for consumption in urban households, such as food, clothing, and even user fees such as water services, etc. However income taxes, stocks, bonds are not included. These goods are compared from one month to the next and the difference is the CPI. The Consumer Price Index is calculated in relation to a base period where it is set from one year to the next. Currently the new base month is May 2000, and this is used to calculate from June 2000 onwards. If the CPI number rises excessively this means that the cost of living is rising and we have inflation. This large number causes the Federal Reserve Board to take action and to make sure this doesn't cause a drop in our economy. IF we have a huge rate of inflation then consumers don't purchase as many goods and services and therefore causing the stocks of companies to drop and this causes our economy also to drop. The CPI is the best indicator if it is looked at over a longer period of a month because it takes a more accurate measure of inflation. The best is to look at it over a year because month to month sometimes you have seasonal trends that cause changes in prices and it has nothing to do with inflation. The Consumer Price Index is our best indicator of inflation and is used in making sure our economy stays stable.
