According to my notes, the Consumer Price Index is “how expensive things are.” In accordance with this definition, I picture the CPI as an endless itemized price list of every item ever sold. Clearly, this is not an accurate picture of the CPI, which indicates that my definition needs some work. The Bureau of Labor Statistics defines the Consumer Price Index 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 other words, the CPI is a measure that tells us both the magnitude and direction of price changes. 

How does it do this? Well, instead of keeping an index of the exact dollar value of every item in the market, it measures the change from its old price to its current price. The CPI is a culmination of price comparisons; it looks at what goods used to cost and tells us whether that same good costs more, less, or the same amount.

The CPI also can tell us just how much prices are changing. Below is one version of the U.S. Bureau of Labor Statics’ CPI chart.

The larger the bars on the chart, the greater the change in price. As we can see, the energy bar is far larger than the other categories and also grows in the opposite direction. This tells us that while the prices of other goods are increasing, the price of energy has dropped dramatically. 

This type of market shift can tell us a lot about the economy. Is energy getting cheaper because there is an abundance of supply? Is energy getting cheaper because advances in technology? Is energy getting cheaper because the cost of production of energy is getting cheaper? Well, to put it bluntly, the CPI doesn’t know and doesn’t care. However, these important questions, all of which carry massive implications about the health and trends of the economy, wouldn’t be getting asked if it weren’t for the data presented by the CPI. By measuring changes in prices, the CPI becomes a valuable trailing economic indicator and allows economists to predict future market changes.  

 The CPI is a crucial tool for economists to both hypothesize about the future of the economy and recognize important trends that have already begun (inflation is the best example of this). Without the CPI, economists would have no streamlined way of knowing how much or in what way prices change. So yes, at its core, the CPI is a measure of “how expensive things are.” But at the end of the day, it is a hell of a lot more helpful than just a running list of numbers.