The consumer price index, also known as the cost-of-living index, plays a vital role in measuring the average price changes that are paid by the American wage-earning individuals. The price paid for purchasing food, shelter, medical costs and transport costs are typically considered while calculating the consumer price index. This price index is expressed mathematically in the form of a percentage of the rates of a few similar goods (and services) on a specific base period.

Very often, the consumer price index is also used for measuring the inflation in a nation. Due to this reason, the index is closely analyzed by the policymakers and the individuals whose average wages fluctuate with the change in the purchasing power of money. This method of calculating the indexes of consumer price is known as the cost-of-living-adjustment or the COLA. In simple words, it refers to the average cost incurred by an individual while purchasing the necessary goods and services to ensure a decent standard of living.

Since 1913, the Federal government started collecting the consumer price indexes for tracking the alterations in the rates of goods and services in two different ways. The first group of consumer price index consists of the comparatively privileged urban workers. Again, the second group, also known as the chained index, consists of all the city dwellers despite their individual statuses of employment. This second group that has about 87% of all Americans has a more accurate and authentic portrayal of the average consumer prices.

What are the different categories of a consumer price index?

A consumer price index can be divided into eight categories. These categories are as follows;

  • Cost for Food and Beverages
  • Cost for Shelter
  • Cost for Clothing
  • Medical costs
  • Transportation costs
  • Recreational costs
  • Education costs and costs for communications
  • Costs for purchasing necessary goods and services

The Bureau of Labor Statistics is responsible for tracking the average prices of around 80,000 goods and services purchased every month, in around 87-90 cities. After collecting the individual prices, this Bureau averages the cost in order to come up with the cumulative weighted average of America. The monthly statistics have the weighted costs of both the groups of the consumer price index.

Consumer price index as an economic predictor

The consumer price index also acts the economic predictor of the nation. Various economics have studied about the inflationary trends and have compared them with major historical events like the World Wars and the Great Depression. With this index, they have studied the factors that contribute to both inflation and deflation. These factors include the basic factors like consumer spending, spending rates and so on. With a proper consumer price index, it is easier for the government to determine and fix the basic fiscal policy which in turn eases the money supplies and raises the interest rates accordingly. Thus, it can be said, that the consumer price index is an extremely significant indicator of economic predictions of America.