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Definition
The consumer price index (CPI) tracks the average change over time in the prices households pay for a fixed basket of consumer goods and services, and is a standard measure of inflation.
How it works
Each country's statistics agency defines a basket of goods and services, such as food, rent, energy, transport and healthcare. Each item is weighted by its share of typical household spending, so a price change in housing counts more than the same change in a small item. Prices are collected regularly, usually every month, and combined into one index number.
The index is set to 100 in a chosen base period, so a CPI of 125 means the basket costs 25% more than in the base period. Inflation is usually reported as the year-over-year change, (CPI now ÷ CPI a year earlier − 1) × 100, while the month-over-month change shows the latest short-term movement. Headline CPI includes everything; core CPI commonly excludes food and energy, whose prices swing a lot, to show the underlying trend. Central banks, wage talks and inflation-linked payments often refer to these figures.
CPI is an average, so your own costs can rise faster or slower depending on what you buy. Methods for handling quality changes and shifts in spending habits differ between countries, and some figures are revised or seasonally adjusted, which can change the monthly numbers.
Example (hypothetical numbers)
Suppose a country's CPI has a base period set to 100, and the index stood at 120.0 a year ago and 124.8 this month.
Year-over-year inflation = (124.8 ÷ 120.0 − 1) × 100 = 4.0%, even though the index rose by 4.8 points.
Last month the index was 124.2, so the month-over-month change = (124.8 ÷ 124.2 − 1) × 100 ≈ 0.48%.
The level of 124.8 also means the basket costs 24.8% more than in the base period.
The same index gives very different-looking numbers depending on whether you compare with last month, last year or the base period.
Common mistakes
- Reading a 4.8-point rise in the index as a 4.8% inflation rate.
- Mixing month-over-month and year-over-year figures when comparing inflation reports.
- Assuming the official CPI matches your personal cost of living.
- Confusing a falling inflation rate with falling prices.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.