|
The Consumer Price Index
As far as Leading Economic Indicators go, the Consumer Price Index (CPI) is one that's fairly familiar by name and even by definition. Though many of us think of the CPI as a measure of inflation, it actually touches our lives in many areas, from taxes and investments to income in retirement.
The Consumer Price Index measures the average change in price over time of consumer goods and services in a fixed market basket.
The "Average" Consumer
The CPI reflects the buying habits of the "average" consumer based on a sampling of 50,000 households and housing units in 87 urban areas across the country. Even if your household is not part of the sample, the dollars you spend still make an impact: Purchasing data is also collected from 23,000 retail stores and outlets by a bevy of economic assistants from the Bureau of Labor Statistics every month.
The Market Basket
Consumer spending data is collected for goods and services in a fixed market basket. The basket is comprised of 2,000 items grouped into eight categories. Each category is given a relative importance, or weight, based on consumer spending. Basics like food, housing and transportation have the greatest weight. While taxes associated with the use of goods and services are included in the CPI, income taxes and investment items are not.
Consumer Spending
| Housing |
40.9% |
| Transportation |
17.0% |
| Food & Beverage |
15.7% |
| Recreation |
6.0% |
| Medical Care |
5.8% |
| Education & Communication |
5.8% |
| Other Goods and Services |
4.3% |
| Apparel |
4.4% |
The Broad Reach of the CPI
The CPI is the most widely used measure of price change, and as such, it is factored into economic decisions in both the public and private sectors. In turn, it affects:
- Taxpayers—The CPI is used to adjust the Federal income tax structure to prevent tax increases due to inflation.
- Employees—The CPI affects cost-of-living increases and the wages of 2 million workers in certain collective bargaining agreements.
- Investors—Coupon payments for inflation-indexed bonds are tied to the CPI.
- Retirees—Social security income is adjusted according to the CPI.
- Insurance customers—Policies with automatic inflation protection utilize the CPI.
- Children—The CPI affects the cost of school lunches.
- Divorcees—Both alimoney and child support payments are affected by the CPI.
The Federal Reserve Board also uses the CPI as it formulates monetary policy. As the economy recovery continues in the U.S., the CPI will be closely watched by the Federal Reserve Board, Wall Street and individual investors for any signs of inflation to come.
Source: Mason Street Funds' StreetTalk Spring/Summer 2002
|
print this page