Kavan Choksi Discusses How Consumer Price Index Is Constructed and Its Uses

The Bureau of Labor Statistics’ Consumer Price Index is extensively used by investors to monitor the economy of the United States, and subsequently make investing decisions on the basis of its changes. The Consumer Price Index or CPI is among the most vital gauge of the U.S. prices. Kavan Choksi points out that the CPI provides a monthly indication of general price movements or inflation. The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) releases the CPI data every month, typically during the second week of the following month.

Kavan Choksi underlines how the consumer price index is constructed and its uses

The CPI tends to measure inflation as experienced by the consumers in their daily living expenditure. The CPI role is monitored by many. After all, inflation has a vital role to play in economic decision-making. It impacts the decision making of large corporations and banks, as well as Wall Street traders. Even individual traders may benefit from keeping an eye on of consumer price trends.

CPI is among the most extensively used inflation measurements. While there are multiple CPI metrics, the most common is the “Consumer Price Index, All Urban Consumers.” This category covers about 93% of the population of the United States. It is often called CPI-U and is commonly considered as “headline inflation” because it is the figure most often quoted by media sources. On the other hand, CPI-W is a subset that covers about 29% of the U.S. population and tracks price changes for urban wage earners and clerical workers. CPI-W is used for determining the cost-of-living adjustments for federal benefits like Social Security.

A commodity and services survey that gathers around 94,000 monthly prices is used by CPI. About two-thirds of the data is collected by survey workers during visits to stores and other establishments. Prices on certain product categories like gasoline and other motor fuels tend to come from outside data providers. Housing, which accounts for a large percentage of the overall CPI, typically uses rental price data from a separate survey for estimating housing rents and the value of shelter for homeowners

Headline CPI is based on the prices of around eighty thousand goods and services, collected on a monthly basis in urban areas. This data is collected from thousands of retail outlets, service providers and even rental housing units. BLS groups the price data by 200+ product and service categories. They subsequently adjust the relative weight of each category in the index every two years on the basis of recent consumer spending patterns.

Kavan Choksi mentions that CPI-W is used to index cost-of-living adjustments for several million beneficiaries of Social Security and Supplemental Security Income. The CPU is also used by the Supplemental Nutrition Assistance Program to make adjustments for numerous recipients of federal aid.

The Consumer Price Index also has an impact on the payments made to millions of military and federal civilian members and retirees, as well as the pay of workers covered by collective bargaining agreements with cost-of-living adjustments.