Prices of goods and services have a huge impact on economic trends and decisions, and hence, the Consumer Price Index or CPI can prove to be an important tool in understanding the impact of inflation on the daily lives of people. As Kavan Choksi Wealth Advisor mentions, right from the rent one pays to the groceries they purchase, the CPI can capture the essence of changing costs in the dynamic markets of today.
Kavan Choksi Wealth Advisor marks the prime uses of the CPI
The Consumer Price Index (CPI) basically is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI impacts almost all Americans due to the many ways it is used, including:
- As an economic indicator: The CPI is among the most extensively used measures of inflation. At times, it is also viewed as an indicator of the effectiveness of government economic policy. The CPI provides valuable insights in regards to the price changes in the economy, and is used by government, business, labor, and private citizens in order to make economic decisions. The Congress, the President and the Federal Reserve Board also use trends in the CPI to help formulate fiscal and monetary policies.
- As a means of adjusting dollar values: The CPI is commonly used for adjusting the income payments of the consumers like Social Security, adjusting income eligibility levels for government assistance, as well as to provide cost-of-living wage adjustments to millions of workers across the United States. The index, in fact, impacts the income of more than 90 million people because of statutory action. This includes more than 38 million Supplemental Nutrition Assistance Program (SNAP) recipients and over 65 million Social Security beneficiaries, among other programs. Adjusting the Federal income tax structure is another good example of the use of CPI in how dollar values may be adjusted. These adjustments can help prevent inflation-induced increases in tax rates. Moreover, eligibility criteria for millions of food stamp recipients and children who eat lunch at school are impacted by changes in CPI. Several collective bargaining agreements also tie wage increases to the CPI.
- As a deflator of other economic series: The CPI and its components tend to be used for adjusting other economic series for price changes, and translating these series into inflation-free dollars. The examples of series adjusted by the CPI include weekly and hourly earnings, retail sales, as well as components of the National Income and Product Accounts. The Consumer Price Index is also used as a deflator of the value of the consumer’s dollar to find its purchasing power. The purchasing power of the consumer’s dollar measures the change in the value to the consumer of services and goods that a dollar can purchase at varying dates. Basically, as prices go up, the purchasing power of the consumer’s dollar goes down.
As Kavan Choksi Wealth Advisor marks, the CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all urban consumer group represents over 90 % of the total U.S. population.