Abbreviated as CPI. Also known as cost-of-Living Index or Retail price Index. It is an economic indicator that measures the evolution of the price of a group of goods and services (consumer basket). If the CPI is positive, it means that prices have increased and, on the contrary, if CPI is negative, it means that prices have decreased.
In the United States, the Bureau of Labor Statistics defines CPI as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” In order to calculate the CPI, the US Bureau of Labor Statistics surveys its population collecting data on the goods and services that consumers buy and creating a “consumer basket” that includes those goods and services that consumers buy the most and they are weighted according to their importance, based on total family expenditures. CPI must be representative of the whole population.
Therefore, out of the two CPI that the US Bureau Labor Statistics makes (CPI for urban wage earners and clerical workers – CPI-W, and the chained CPI for all urban consumers- C-CPI-U); the C-CPI-U is the best one, because it accounts for 87% of the population. It is an important measurement in order to know how much prices of goods and services are rising (or falling). Therefore, it is commonly used to identify periods of inflation or deflation. However, it is important to know that it cannot be used to measure differences in price levels between one place and another; it only measures changes over time in the same place.
A higher index for one area does not necessarily mean that prices there are higher than in another area with a lower index; it just means that in that particular area the price level has risen. If the CPI registers a strong increase, it will mean that our purchasing power will be decreased, because with the same amount of money, we can buy less goods and services.