How the Consumer Price Index is measured
Key takeaways
04 · ideas- BLS surveys 80,000+ prices in 23 geographic areas monthly
- Shelter is the largest component at about 33% of CPI
- Core CPI excludes food and energy to reduce volatility
- PCE — not CPI — is the Fed's primary inflation target
Basic level
The essentials · 1 min
The Consumer Price Index (CPI) measures the average change in prices paid by urban consumers for a market basket of goods and services. Published by the Bureau of Labor Statistics (BLS), it is the most widely cited inflation measure in the United States.
CPI components by approximate weight:
| Category | Share |
|---|---|
| Shelter (housing) | ~33% |
| Food | ~14% |
| Energy | ~7% |
| Medical care | ~7% |
| Transportation | ~8% |
| Other | ~31% |
CPI-U (All Urban Consumers): The standard headline figure, covering 93% of the US population.
Core CPI: Excludes food and energy, which are more volatile. Used to identify underlying inflation trends.
Intermediate level
How it applies · 2 min
CPI-U vs. PCE
PCE (Personal Consumption Expenditures): Produced by the Bureau of Economic Analysis. The Federal Reserve uses PCE as its primary 2% inflation target. PCE tends to run 0.3-0.5% below CPI-U due to differences in methodology and weighting.
Chained CPI (C-CPI-U): Updates weights more frequently to reduce substitution bias (the tendency of fixed-weight indices to overstate inflation when consumers switch to cheaper alternatives). Runs approximately 0.25-0.30% below CPI-U annually.
Shelter methodology
Housing uses Owner's Equivalent Rent (OER) for homeowners — the hypothetical rent that would be paid on the open market. Because OER is estimated from surveys that update slowly, shelter inflation in CPI tends to lag actual rental market changes by 12-18 months.
Advanced level
The math, step by step · 1 min
The Laspeyres formula
CPI uses the Laspeyres formula with periodic updates:
This fixed-weight approach is criticized for not accounting for substitution. The BLS introduced C-CPI-U (using a superlative Fisher index) to address this, though C-CPI-U is released with a lag and CPI-U remains the primary benchmark.