consumer price index (CPI)

Suppose you wanted to settle an argument about whether life has gotten more expensive. You could not just compare one price, because some things rose and others fell. So you would fill an imaginary shopping cart with the typical month's purchases of an ordinary family — food, rent, transport, clothes, a haircut, a phone plan — and check what that exact cart costs this year versus last year. The consumer price index does precisely this, for a whole country, every month.

The CPI is a price index that tracks the cost of a fixed "basket" of goods and services bought by a typical household. Statisticians survey thousands of prices, weight each item by how much households actually spend on it (rent counts far more than salt), and roll it all into one number pinned to a base year of 100. If the basket cost 100 dollars in the base year and 106 dollars now, the CPI is 106, and consumer inflation since the base year is 6 percent. It is the headline gauge of the cost of living and the inflation rate most people feel.

The CPI is powerful but imperfect, and its biases mostly push it to overstate inflation. Because the basket is fixed, it misses substitution (when beef gets dear, people buy chicken) and struggles with quality improvements and brand-new products (a phone today is not the phone of a decade ago). It can also misweight any one household's life — a renter and a homeowner, a city dweller and a farmer, feel very different inflation. So the CPI is a careful national average, not a personal one, and statistical agencies constantly revise their methods to keep it honest.