Measuring inflation using the consumer price index

Inflation is an increase in the overall level of prices. Because rising prices reduce the buying power of money, inflation can also be defined as a decline in the value of money.

The rate of inflation is a measure of how fast prices are rising. It is computed as the percentage increase in the level of prices between two time periods.

The consumer price index (CPI) is the most widely used measure of consumer price inflation. The CPI measures the average change over time in the prices paid by urban consumers for goods and services. The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor collects the CPI price information and calculates the CPI statistics.

Consumer Price Index FAQ

What are the CPI-U and the CPI-W?

BLS measures the CPI for two population groups:

  1. All Urban Consumers (CPI-U)
  2. Urban Wage and Clerical Workers (CPI-W)

The CPI-U measures consumer price inflation for all U.S. residents of urban areas, which accounts for about 87 percent of the U.S. population. The CPI-W measures consumer price inflation for a subset of the CPI-U population: residents of urban areas who live in households that:

  • receive more than half of their income from clerical or wage occupations, and
  • have one earner employed for at least 37 weeks during the previous 12 months.

The CPI-W covers about 32 percent of the U.S. population.

The CPI-U is the most commonly used index because it has the broadest population coverage. However, the CPI-W is used sometimes to make cost-of-living adjustments for labor contracts.

What is the Seattle CPI?

In addition to the national CPI, the BLS publishes CPI statistics for 26 of the nation's metropolitan areas. However, it does not compute the CPI for states. For the Seattle area, the BLS computes both the CPI-U and the CPI-W for the Seattle-Tacoma-Bremerton, Washington, metropolitan area, which includes Island, King, Kitsap, Pierce, Snohomish, and Thurston Counties. In 2000, this area was home to 3.6 million people, which is 60 percent of the state's total population.

Consumer price indexes for metropolitan areas are significantly more volatile than the national index because substantially fewer goods and services are analyzed when computing a metropolitan-area CPI vs. a national CPI. Using fewer items to assess price changes results in substantially more sampling and measurement error.

How is the CPI index used to measure price change?

The CPI measures the average change over time in the prices paid by urban consumers for a representative selection of consumer goods and services. The selection of goods and services (commonly referred to as the "market basket") is based upon actual consumer purchasing patterns, which are determined from a survey of consumer expenditures. Goods and services in the market basket are weighted according to the share they constitute of total consumer spending. The major expenditure categories are:

  • Food and beverages
  • Housing
  • Apparel
  • Transportation
  • Medical care
  • Recreation
  • Education and communication
  • Other goods and services

How often are CPI data published?

U.S. CPI data is published each month; in addition, annual CPI data is published each year. The Seattle CPI data is published both annually and bimonthly (every other month) beginning with February.

How do you use the CPI to measure inflation between two time periods?

To compute the rate of inflation between two time periods, calculate the percent change in the appropriate CPI index from the first period to the second period. The following example computes the change in the Seattle CPI-U from 1998 to 2003:

1998 Seattle CPI-U index:    167.7
2003 Seattle CPI-U index:    192.3
Change in index:    24.6
Compute percent change:    (24.6 / 167.7) * 100 = 14.7
Percent change:    14.7 percent

How do you inflate a past dollar value into present-day dollars?

To inflate a past dollar value into present-day dollars, multiply the past dollar value by the ratio of the present year CPI to the past year CPI. For example, assume you want drop to know what a $100 in 1993 would be worth in 2003, based on Seattle area inflation.

1993 dollar value:    $100
1993 Seattle CPI-U index:    142.9
2003 Seattle CPI-U index:    192.3
Computation:    $100.00 * (192.3 / 142.9) = $134.57
2003 dollar value:    $134.57

How do you deflate a future dollar value into present-day dollars?

To deflate a future dollar value into present day dollars, multiply the future dollar value by the ratio of the current year CPI index to the future year CPI index. For example, assume you want to want to know what a $100 in 2013 would be worth in 2003, based on a forecast of Seattle area inflation.

2013 dollar value:    $100
2003 Seattle CPI-U index:    192.3
2013 Seattle CPI-U index (forecast):    239.2
Computation:    $100.00 * (192.3 / 239.2) = $80.39
2003 dollar value:    $80.39

How do you remove inflation from an historical series of prices?

Economists often want to remove inflation from an historical series of prices to see how those prices would have changed over time had there been no inflation. For example, we might want to remove inflation from an historical series of oil prices to see how current oil prices compare to oil prices at earlier times, such as following the 1973 oil embargo.

To convert an historical series of prices into present-year dollars, multiply the dollar value for each year by the CPI index for the present year (in this example 2003), then divide by each year’s CPI index, as shown below:

YearPast Price CPI Calculation*Present Price (2003)
1998 $105.00 167.7 105.00 x (192.3 / 167.7) $120.40
1999 $110.00 172.8 110.00 x (192.3 / 172.8) $122.41
2000 $113.00 179.2 113.00 x (192.3 / 179.2) $121.46
2001 $119.00 185.7 119.00 x (192.3 / 185.7) $123.23
2002 $121.00 189.3 121.00 x (192.3 / 189.3) $122.92
2003 $122.00 192.3 122.00 x (192.3 / 192.3) $122.00

* (Past Price) x ((Present CPI) / (Past CPI))

Where can I find more information about the CPI?

The U.S. Department of Labor's Bureau of Labor Statistics (BLS) web site contains extensive information on the CPI, including explanations of the methodology used to collect and compile the data. It also provides access to historical CPI data. The web site address is: http://www.bls.gov/cpi/home.htm.