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The Consumer Price Index (CPI) is one of the most commonly used measures of the price level. The price level refers to the average level of prices across different kinds of goods and services. The U.S. Bureau of Labor Statistics (BLS) calculates the CPI on a monthly basis. In particular, the CPI is designed to measure the average level of prices of goods typically purchased by U.S. households. The BLS has defined the goods and services to be included in this typical ‘market basket’ to represent normal consumer expenditures. These average prices are obtained by associates of the BLS who literally head to malls, super markets, gas stations, and so on, to uncover the current level of prices of such goods and services as food, gas, clothes, shelter, entertainment, health services, etc. These surveys are taken across the country, in large and small cities. All of the prices are then used to form the CPI itself.

At a given point in time, the value of the CPI has little direct meaning. For example, during August 2001, the CPI stood at 177.5. This value does not represent a particular price, rather, it only has a meaningful interpretation when compared to the value of the CPI in a previous time period. Currently, the CPI is set equal to an average value of 100 for the period 1982-1984. This means that the August value of 177.5 was 77.5 percent higher than the average value for the period 1982-1984. So, the prices of goods commonly purchased by consumers have risen 77.5 percent since that time.

We also often use the CPI to calculate the rate of inflation over the last month, or over the last year. As an example, the CPI during August 2000 was 172.8. The rate of consumer price inflation over the last twelve months is simply the percent change in the CPI between August 2000 and 2001. This works out to: 100 * (177.5 – 172.8) / 172.8, or 2.7 percent. As of August 2001, the annual rate of inflation was 2.7 percent.

So, the CPI is used to measure the average price level of goods purchased by households, and changes in the CPI are used to measure inflation. There are other common measures of the price level, though they are based on different combinations of goods and services.

The Producer Price Index (PPI) measures the average prices for a basket of inputs commonly purchased by businesses. The PPI can be a useful indicator of future consumer inflation, as changes in prices paid by producers (changes in business costs) often precede changes in prices paid by consumers. The U.S. Bureau of Economic Analysis calculates the GDP Deflator – a measure of the average prices of all goods and services produced domestically, without regard to what group purchases the output.

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