What CPI measures — and what it doesn't

The Consumer Price Index measures the average change over time in the prices paid by urban consumers for a basket of goods and services. The US Bureau of Labor Statistics publishes it monthly.

How it is constructed

Statisticians collect prices for thousands of specific items across categories — food, housing, transport, medical care, recreation, education and more. Each category is weighted by roughly how much of a typical household's spending it represents. The weighted average of those price changes is the index.

Headline versus core

• Headline includes everything. It is what households experience and what political debate uses.
• Core excludes food and energy, because those two are volatile and driven largely by supply. Central banks watch core because it is a better guide to the underlying trend — and because interest rates cannot increase the supply of oil.

When headline is far above core, as it is now, the difference is usually energy. That distinction determines the policy argument: a central bank can reasonably look through a supply shock, or reasonably decide that looking through it for too long changes what people expect prices to do.

Why your inflation rate is different

The index describes an average household. You are not one.

• If you drive a lot, gasoline at +24.6% dominates your experience while carrying a small weight in the index.
• If you have a fixed-rate mortgage set years ago, the shelter component — the largest single weight — does not apply to you in the way the index assumes.
• If you have children in childcare or a family member in medical treatment, your basket is concentrated in categories that behave nothing like the average.

Known limitations worth knowing

• Substitution. When beef gets expensive, people buy chicken. Indices attempt to account for this, and the adjustment is genuinely contested.
• Quality change. A phone that costs the same as five years ago but does considerably more is, in index terms, cheaper. Reasonable people disagree about the size of that adjustment.
• Shelter lags. The housing component reflects rents across the entire stock of leases, not the price of a new lease signed today, so it turns slowly.