Understanding the Consumer Price Index #CPI

What is the Consumer Price Index for All Urban Consumers (CPI-U)?

The Consumer Price Index for All Urban Consumers (CPI-U) measures the changes in the price of a basket of goods and services purchased by urban consumers. The urban consumer population is deemed by many as a better representative measure of the general public because most of the country’s population lives in highly populated areas, which represent close to 90 percent of the total population.

Understanding the Consumer Price Index for All Urban Consumers (CPI-U)

The consumer price index is the most frequently used statistic for identifying inflation or deflation. The Consumer Price Index for All Urban Consumers only considers the prices paid for goods and services by those that live in urban areas. Rising CPI-U figures means that the prices of goods/services within the urban population are becoming more expensive, and this may be a sign of rising inflation.

All variants of the CPI are similar to the cost of living indexes as they assess prices in the market based on the goods and services needed to achieve a given standard of living. Different measures of CPI differ from the cost of living indexes because they do not account for changes in other facets of standard of living, such as changes in environmental factors.

The all-urban consumer population consists of all urban households in Metropolitan Statistical Areas (MSAs) and urban places of 2,500 inhabitants or more. Non-farm consumers living in rural areas within MSAs are included, but the index excludes rural consumers and the military and institutional population. The Consumer Price Index for All Urban Consumers was introduced in 1978 is representative of the buying habits of approximately 80 percent of the non-institutional population of the United States, compared with 32 percent represented in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The methodology for producing the index is the same for both populations.

Uses of the Consumer Price Index for All Urban Consumers (CPI-U)

CPI-U is used to measure inflation and operates as an indicator of the effectiveness of government fiscal and monetary policy. Business executives, labor leaders, and other private citizens also use the CPI-U (and other CPI components) as a guide in making economic decisions. CPI-U is also used to adjust other economic series for price change and to translate those series into inflation-free dollars.

CPI-U and its other CPI components are also used means for indexing populations. For example, over 2 million workers are covered by collective bargaining agreements which tie wages to the CPI or CPI-U. Changes in the CPI-U can also affect the cost of lunches for the 26.7 million children who eat lunch at school. Some private firms and individuals use the CPI to keep rents, royalties, alimony payments, and child support payments in line with changing prices.

Author: The Williamson Group

Veteran Owned Small Consulting Business

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