The CPI measures prices of a basket of goods and services that represents the average spending of American cpi là gì families. To gather the data, BLS data collectors visit or call thousands of retailers, service providers and landlords.
The Federal Reserve aims for 2% inflation. But, excluding volatile food and energy prices, core consumer inflation remains subdued.
Food
Food prices are a significant component of the overall CPI. They make up 13.4% of the index and are often volatile month to month, largely due to supply and demand factors. For that reason, they are stripped when calculating core inflation rates. On a monthly basis, the BLS surveys households about what they spent on foods and beverages in the previous month. The data is then processed to remove typical seasonal influences and identify underlying trends. The results are then published as both seasonally adjusted and not seasonally adjusted data.
Both data sets are useful for understanding and analyzing month-to-month price changes. However, the seasonally adjusted data is better for identifying underlying trends over longer periods of time. It is also more useful for official purposes, such as escalation of government payments.
Although the price increase has been sharp, the actual impact of rising food costs on consumers is less dramatic than in other goods categories. This is because unlike other discretionary items, people have to eat food every day. Consumers might be able to avoid some food prices increases by switching to cheaper versions of products (e.g. ground beef versus steak) or by eating at home more than they usually do (which reduces the cost of meals out).
But some of the increase in food prices is due to people reverting to pre-COVID habits, as well as national factors such as people stockpiling food ahead of possible shortages. That said, higher food prices are hitting lower-income households the hardest, because they spend a larger share of their budgets on food.
In some countries, persistently high food inflation can trigger higher expectations of future inflation. This can become a self-fulfilling cycle, as workers might demand higher wages in response to perceived inflation and companies then respond by raising prices on their goods. In addition, high food inflation can contribute to economic instability in poorer countries, such as the recent turmoil in Argentina and Sri Lanka, as it erodes purchasing power. These issues are why it is important for governments to monitor the inflationary trend of food prices, both in developing and advanced markets.
Energy
The specter of high energy prices creates anxiety about future inflation in most economies. However, the direct effect of energy price shocks is limited by the relatively small share of expenditures on gasoline in most developed economies. As a result, unexpected increases in the price of gasoline have only a blip effect on overall headline CPI inflation and are short-lived.
Indirect effects are more powerful and longer-lived. For example, higher oil prices cause transportation and other costs to rise, and thereby increase the inflation rate. In addition, if oil price shocks are followed by unexpectedly lower energy prices (as in the second half of 2022), that will accelerate disinflation and reduce overall inflation.
To construct a price index, a collection of prices is made of the goods and services that people purchase, including food, shelter, gas, electricity and other fuels, clothing and shoes, education, entertainment, medical care and housing. This collection is called the consumer basket.
Using data from the consumer basket, the CPI computes a weighted average of changes in price for each good or service over time. The resulting index is then normalized to equal 100 in a chosen base period, such as 1982-84. Index values, along with 1-month and 12-month percent changes, are published.
Sampling error is the uncertainty in index estimates that arises from the fact that the CPI is based on a sample rather than the total universe of prices. Sampling error can be reduced by increasing the size of the sample and reducing the number of observations per item.
Nonsampling error in the CPI results from errors in the type of data collected, the methods used to collect it, the data processing routines and estimation procedures. This error can be more significant than sampling error.
For example, the accuracy of an index is threatened if respondents misreport the price of an item, or fail to report the information required by the survey instrument. Misreporting is often due to respondent memory or recall errors, interviewer effects, distortion of responses or misunderstanding of the purpose and nature of the survey.
Shelter
The CPI is typically sliced into three pieces: food, energy and “all items less food and energy.” The latter gets considerable attention as a more reliable measure of underlying inflation that is not subject to the volatility of food and fuel prices. However, it can be challenging to discern signal from noise in the monthly data, especially at shorter, more frequent intervals. The figure below breaks out the most recent data for core CPI on a 3-month, 6-month and 1-month basis to show that the rate of price growth has slowed significantly from its elevated level but still remains very high.
As with the broader CPI, a number of variables must be controlled to produce accurate and useful statistics. In particular, the bureau seeks to maintain a steady rate of change over time, so it strives to collect the same set of goods and services each month. This goal is achieved by aggregating the results of price surveys from around 8,000 housing units and 23,000 retailers, service providers and online retailers in 75 urban areas throughout the country. The individual item prices collected are then compiled into a market basket and weighted to reflect the relative importance of each product in a typical household’s purchase decisions. The market basket is then recomposed into the final set of prices reported on each monthly release.
Because consumption patterns can vary substantially over the course of a year, month-to-month CPI data must be seasonally adjusted to remove typical seasonal influences and enable economists to more easily identify underlying trends. The process is complex and takes many months of historical data, so it is often hard to detect trends at the short-term horizon.
The most recent monthly CPI data shows that the year-over-year pace of price gains has cooled considerably from its near-crisis high in June 2022, but it is still well above the Federal Reserve’s 2% annual target. This is partly due to a reversal in the trend of shelter costs, which account for about one-third of the CPI’s weighting. The latest figures showed that owner’s equivalent rent and the index of lodging away from home both rose at a faster annual pace than the regular CPI-U, but still came in a little below.
Services
The CPI measures price changes in the goods and services that make up consumers’ day-to-day expenses. While the basket of goods and services that comprise the index can vary, there are certain items that are more sensitive to inflationary trends than others. For example, the most volatile component of the CPI is gasoline. While it accounts for only 4% of the total CPI basket, the prices of regular unleaded gasoline have been increasing rapidly since December 2020, rising almost 50% by May 2022.
Another volatile component of the CPI is energy, including fuel oils, propane, kerosene, and piped natural gas. While these prices were lower in May than in the previous month, they’ve been climbing much faster than other components of the CPI. In fact, according to the Bureau of Labor Statistics, the average monthly price increase for these products has been nearly double that of the other components of the CPI since the pandemic began.
The volatility in these two commodity prices demonstrates how difficult it can be to accurately measure inflation. But, as economists study the data behind these figures, they’ve found that there are some underlying dynamics at play. One of these is that the success of the Volcker-era Fed in lowering inflation appears to have “anchored” inflation expectations. Survey measures of consumer inflation expectations have seen a consistent pattern of lower volatility over the past few decades, and these patterns appear to be reflected in sticky-price CPI regression lines.
But that doesn’t mean that overall inflation has stopped. In fact, the overall rate of CPI inflation was slightly higher in May than it was the previous month, with the rise led by higher food and shelter prices. But, if we look at core consumer inflation (excluding the more volatile food and energy components), it actually saw a decline in the year-over-year rate over the past three months.
With all the ups and downs of inflation, it can be a challenge for businesses to stay on top of their market. Smart businesses take the time to understand inflation’s effects and adjust accordingly. This can include pricing strategies, inventory management, and other tactics that help mitigate the impacts of prolonged inflationary periods.