The Consumer Price Index (CPI) is a measure of the average change in the prices paid by urban consumers for a fixed basket of goods and services. Through the Consumer Expenditure Survey, the U.S. Department of Labor surveys consumers to find out what consumers buy and what share of consumer incomes are spent on each item. This survey is used to create a basket of goods purchased by the average consumer. The price of the basket of goods becomes the base period cost. The U.S. Department of Labor then surveys stores to determine the price and quantity of goods sold to consumers. The monthly CPI indicates the increase in the price of the basket of goods since the base period. The price is indexed to make it easier to understand by setting the price in the base period equal to 100. Any price increases are represented as a percentage increase since the base period. A 3% price increase since the base period would result in an index of 103.
There are different types of CPIs published. The most commonly used index is the Consumer Price Index for All Urban Consumers, or the CPI-U. The CPI-U represents about 87 percent of the total U.S. population, but excludes consumers in rural areas, in the armed forces, and those living in institutions (such as prisons or mental institutions). The CPI-U can be broken down into the Energy Index, the Food Index, and the All Items Less Food and Energy Index (also referred to as core inflation). Each of these categories can be disaggregated further to more specific products. The Department of Labor also publishes another index that only includes consumers who are wage earners and clerical workers, called the Consumer Price Index for Urban Wage Earners and Clerical workers (the CPI-W). Consumers that are earning a wage often purchase different items than consumers who are retired or earning a degree, so the CPI-W is slightly different than the CPI-U. The CPI-W represents about 32 percent of the U.S. population. The third price index published is the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). The C-CPI-U is exactly the same as the CPI-U, but it uses different mathematical techniques that better represent changes in what consumers buy, rather than measuring prices in the same basket of goods.
More information on the Consumer Price Index can be found on the Bureau of Labor Statistics website at http://www.bls.gov/cpi/ or by reading the frequently asked questions.