Question 1

What is the CPI?

Accepted Answer

The Consumer Price Index. The Bureau of Labor Statistics tracks the prices of a fixed basket of goods and services that a typical urban household buys, and publishes the change every month. That change, year over year, is the headline inflation number you see in the news. The basket has thousands of items in it, from gasoline to gym memberships to a haircut, all weighted by how much the average household spends on each. When the headline says CPI rose 3% over the last twelve months, it is saying the same basket that cost $100 last year now costs $103. The number is not your personal experience. The number is a national weighted average.

Question 2

What is core CPI?

Accepted Answer

Headline CPI minus food and energy. The Fed and most economists track core because food and energy prices bounce around month to month for reasons that have nothing to do with monetary policy. A drought in Brazil, a refinery fire in Texas, OPEC deciding to cut production by half a million barrels. Strip those out and you get a cleaner read on the trend the Fed can actually do something about, which is the price of services, rent, wages, and the stuff that moves slowly. Core runs a few tenths different from headline most months. The trade-off is that food and energy are the things you actually buy every week. Core is the right policy variable. It is not the right grocery bill.

Question 3

What is the difference between CPI and PCE?

Accepted Answer

Two different agencies measure roughly the same thing and get slightly different answers. CPI comes from BLS and tracks what urban households pay out of pocket. PCE, the Personal Consumption Expenditures index, comes from the Bureau of Economic Analysis and counts everything purchased on your behalf, including the health care your employer's insurance pays for. CPI usually runs a few tenths higher because its basket updates less often, so it does not fully capture the fact that when steak gets expensive you buy more chicken. The Fed targets 2% PCE, not CPI, which means the headline you read is not the headline the Fed is watching. The longer write-up is on the inflation page.

Question 4

How is the CPI basket determined?

Accepted Answer

BLS surveys roughly 36,000 households every two years through the Consumer Expenditure Survey, asks them what they bought, and uses the results to set the relative weights of every category in the basket. Then a separate team of price collectors fans out across 75 urban areas every month and records the actual prices of about 80,000 specific items, from a gallon of milk at a particular grocery store to the rent on a particular apartment. The weights get updated on a two-year lag, which is why the basket sometimes feels behind reality during fast-moving years. The methodology is dry, public, and considerably more thorough than the Twitter takes about it suggest.

Question 5

Why does CPI feel wrong to me?

Accepted Answer

Because your basket is not the BLS basket. The headline number weights housing at 33% and food at 14%, but if you rent in a hot city and have three kids, your real weights are closer to 50% housing and 25% food, and a 5% rent increase obliterates the comfort of cheaper electronics. The other piece is salience. You see the price of gas every time you drive past a station and you notice the price of eggs every week, but you do not notice the prices that fell, because nothing makes you look. The headline is a national weighted average. Your inflation is a personal weighted average. They are almost never the same number, and the gap is widest exactly when prices are moving the fastest.

The CPI basket, decomposed.

What goes into the headline CPI number.

How much one category moves the headline.

CPI, answered.

The CPI basket, decomposed.

What goes into the headline CPI number.

How much one category moves the headline.

CPI, answered.

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