Explainer · Markets & Macro
What is CPI? Inflation and the consumer price index explained
Inflation is the slow rise in prices that makes the same money buy less. The consumer price index (CPI) is the most widely quoted way of measuring it, and once you can read it, a lot of financial news starts to make sense.
Quick answer
The CPI measures the average change over time in the prices consumers pay for a representative basket of goods and services [3]. The percent change in the index between two dates is the inflation rate for that period. In the US it is published monthly [3].
Key points
- Inflation is a general rise in the overall price level, not a price change in one product [1].
- The US CPI tracks about 80,000 item prices each month [3].
- Use percent change, not index points: 112.5 to 121.5 and 225 to 243 are both 8.0% [3].
- The Fed's 2% goal is measured with the PCE price index, not the CPI [1].
- At 3% a year, $100 buys only what $74.41 buys today after 10 years (calculated).
On this page
What is inflation?#
The Federal Reserve defines inflation as the increase in the prices of goods and services over time [1]. The key word is general: inflation is a rise in the overall price level across the economy, not a jump in the price of coffee or fuel on its own [1]. The Reserve Bank of Australia uses almost the same words [2].
For anyone holding cash, inflation is a quiet cost. Money sitting still buys a little less each year, and the effect compounds.
What does the CPI actually measure?#
The US Bureau of Labor Statistics (BLS) describes the CPI as a measure of the average change over time in the prices paid by consumers for a representative basket of consumer goods and services [3]. To build it, the BLS records the prices of about 80,000 items each month, and national indexes are published monthly [3].
There is more than one CPI. The CPI-U covers over 90% of the US population, and the CPI-W, a subset of it, covers about 30% [3]. Many people also follow a "core" index that leaves out food and energy because those prices are relatively volatile [3].
The Fed watches several price indexes because they cover different things and are calculated differently. Its own benchmark is the PCE price index, which it prefers because it covers a wide range of household spending [1].
The four measures you will see most often in US news, side by side:
| Measure | What it covers | Why people use it |
|---|---|---|
| CPI-U | Prices paid by urban consumers; over 90% of the population | The broad CPI, published monthly |
| CPI-W | A subset of CPI-U; about 30% of the population | A narrower group of households |
| Core CPI | CPI without food and energy | Those prices swing a lot, so core can show the trend more clearly |
| PCE price index | A wide range of household spending | The measure behind the Fed's 2% goal |
Sources: BLS CPI FAQ [3]; Federal Reserve [1].
How do you read a CPI number?#
A CPI figure is an index level, not a price and not a percentage. Most CPI series use 1982-84 as the reference base, set equal to 100 [3]. The BLS explains that an index of 110 means prices are 10% higher than in the reference period, and 90 means they are 10% lower [3].
To get an inflation rate between any two dates, you calculate the percent change between the two index levels. The BLS recommends percent changes over index-point changes because points depend on the starting level [3].
inflation % = (new index - old index) / old index × 100
- Find the two index levels
Use the same index (for example CPI-U) for both dates, such as the same month one year apart.
- Subtract the old level from the new one
In the BLS example, Item A goes from 112.500 to 121.500: a change of 9.0 index points [3].
- Divide by the old level
9.0 / 112.500 = 0.08 [3].
- Multiply by 100
0.08 × 100 = 8.0%. That is the price change over the period [3].
The second item rose twice as many points but by exactly the same percentage. That is why a headline saying "the CPI rose 9 points" tells you little until you know the starting level.
What causes inflation?#
The Reserve Bank of Australia groups the causes into three families [2]:
Demand-pull. Total demand for goods and services grows beyond what the economy can sustainably produce. The excess demand puts upward pressure on prices across a broad range of goods and services [2].
Cost-push. The economy's ability to supply goods falls. Higher prices for inputs such as oil or raw materials push up production costs, and supply disruptions from unusual weather or natural disasters can do the same [2].
Expectations. What households and firms believe about future price rises can change today's decisions. If workers expect higher inflation they may ask for higher wages, and firms may raise prices to cover higher labour costs [2].
The exchange rate matters too. When a country's currency falls in value, goods produced overseas become relatively more expensive, which adds to inflation [2]. Read more in what moves exchange rates.
Why do markets watch CPI releases?#
Because inflation feeds into interest rates, and interest rates feed into almost every price. US law gives the Fed the goal of stable prices alongside maximum employment [4], and the Fed tracks the Labor Department's CPI as well as its preferred PCE index [1]. Central banks also try to guide what people expect inflation to be, because those expectations influence prices [5].
Rate changes then reach bonds, shares and the currency, which we explain in how interest rates affect markets. The timing of the data is public: every 2026 CPI release on the BLS schedule is listed at 08:30 AM. The September 2026 CPI is scheduled for October 14, 2026, October's for November 10 and November's for December 10 [6]. Dates can change, so check the schedule, or an economic calendar, before relying on one.
Why can your own inflation differ from the CPI?#
The CPI is an average for a representative basket [3]. Your own spending will not match that basket exactly: a renter, a car commuter and a retiree all spend differently, so prices that matter to one may barely matter to another.
The BLS also points out that although the CPI is often called a cost-of-living index, it differs in important ways from a complete cost-of-living measure [3]. For example, it excludes income and Social Security taxes [3]. Use it as a reference point for the economy, not as an exact measure of your own budget.
Mistakes beginners make with CPI and inflation#
- Reading index points as percentages
A 9-point rise can be 8.0% or much less, depending on the starting level. Always convert to percent change [3].
- Mixing monthly and yearly figures
A 0.3% rise in one month is not 0.3% inflation for the year. Repeated for 12 months it compounds to about 3.66% (calculated).
- Assuming the Fed targets CPI
The Fed's 2% goal is defined using the PCE price index [1].
- Thinking inflation means every price rises
Inflation is a rise in the general price level [1]. Some prices can fall while the average still goes up.
- Ignoring inflation when holding cash
At 3% a year, $100 in cash buys what $74.41 buys today after a decade (calculated).
Frequently asked questions#
What does CPI stand for?
Consumer price index. The BLS defines it as a measure of the average change over time in prices paid by consumers for a representative basket of goods and services [3].
How often is CPI published?
What is the difference between CPI and core CPI?
Core CPI leaves out food and energy, whose prices are relatively volatile, to show the underlying trend more clearly [3].
Is CPI the same as the cost of living?
Not exactly. The BLS says the CPI differs in important ways from a complete cost-of-living measure, and it excludes income and Social Security taxes [3].
The bottom line#
The CPI is an index of what a typical basket of consumer goods and services costs, and the percent change in that index is the inflation rate. Learn to read it in percent, not points, remember the Fed's own target uses a different index, and treat release days as information rather than a trading opportunity. Inflation erodes cash quietly, so it is worth understanding before you decide what to do with your savings. Read our risk disclosure before trading anything with leverage.
Sources
- What is inflation, and how does the Federal Reserve evaluate changes in the rate of inflation?.
- Causes of Inflation.
- Consumer Price Index Frequently Asked Questions.
- Monetary Policy: What Are Its Goals? How Does It Work?.
- Transmission mechanism of monetary policy.
- Schedule of Releases for the Consumer Price Index.
- Customer Advisory: Eight Things You Should Know Before Trading Forex.
Education only. This page is not investment, tax or legal advice. Trading and crypto can lose you money. See our risk disclosure.
