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CPI Inflation Rate – How is it calculated? Its Uses and Effects!

On 13 Feb, the January 2024 CPI (Consumer Product Index) report was released by the Bureau of Labor Statistics. The current report of BLS shows it is far from the Fed’s 2% target, which is concerning for the people. Let’s understand the CPI inflation rate and its effect on people’s lives.

CPI Inflation Rate

The BLS report shows an unexpected turn of events, the CPI has increased by 0.3% in January 2024 on a seasonally adjusted basis. 

In December 2023, it was raised to 0.2%, and the overall index was increased by 3.1% for last year’s seasonal adjustment.

The food and shelter index has also hiked to 0.4% and 0.6%, respectively. The food-at-home index rose to 0.4% and food away from home rose by 0.5%, which could increase the problem of consumers.

Amid hikes, BLS reported a decrease in the energy index by 0.9%, which is mainly due to the decline in the gasoline index. 

The increased indexes in January include shelter, medical, and motor vehicle insurance. The decline in indexes can be seen only in used cars, apparel, and trucks. 

The CPI index for “all items less food and energy” faced a 0.4% hike. Figure 1. Shows the percent change over the 12 months,  the all-items index rose to 3.1% in January, which is slightly decreased from the 3.4% increase seen in December. 

The price of food items is going to be higher with the increasing inflation rate which is quite concerning.

How does BLS calculate the CPI inflation rate?

The CPI tells the monthly variation of the price paid by the US consumers. It is calculated and reported by the Bureau of Labor Statistics every month. 

BLS collects the data from the US Census and selects the urban areas from where they collect the data on goods and services prices.

BLS also conducts a Consumer Expenditure Survey to know the average expense of consumers in urban areas.

The BLS calculates the CPI as the weighted mean of prices paid by urban consumers for a basket of goods and services which represents the spending of the US consumers.

The CPI inflation rate helps in depicting inflation and deflation.

The formula for CPI Measure:

First is the annual CPI formula, which tells the current cost of goods and services in the basket.

Annual CPI =Value of Basket of the yearValue of the Basket previous year 100

The BLS calculates the value of the basket which consists of popular items purchased by the US consumers.  

The inflation rate is calculated by utilizing the current year’s CPI and the previous year’s CPI. Here’s the formula:

Inflation rate = Current CPI – Prior CPIPrior CPI 100

The inflation rate is calculated annually or monthly using the same formula.

CPI Inflation Rate

Use of the CPI inflation Rate

  • CPI is used in many ways, it can be used as an economic indicator to measure inflation. CPI rates depict the effectiveness of government policies, which can help the government in making good economic decisions.
  • CPI directly affects the prices and the change in the purchasing power of consumers. Businesses and consumers use the CPI inflation rates to make monetary strategies and their investment plans. They make their financial decisions keeping CPI in mind.
  • CPI is used to calculate the cost of living adjustment for federal assistance payments to US citizens.
  • CPI is used to adjust the wages/ payment rates after the effects of inflation.

Effect of CPI inflation rate

  • The inflation rate directly affects the purchasing power of consumers, if it increases, the purchasing power of consumers decreases. 
  • CPI also adjusts the value of the dollar, it affects the income of people because of statutory actions such as social security beneficiaries, SNAP Supplemental Nutrition Assistance Program, etc.
  • CPI automatically affects the governmental assistance and the cost of living wage adjustments of millions of US citizens. With greater CPI, the citizens can expect more assistance and a rise in income.
  • With the rise in inflation, people can expect less rigidity in government policies.

The current inflation in food, shelter, and services is challenging the federal goals of inflation targets.  The 2022 inflation pressure is diminished, but seeing the current charts, the journey towards a stable economy seems bumpy. 

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