CPI

A fixed basket of out-of-pocket consumer spending, priced every month. The weights and the shelter inside it do most of the explaining, and the basket is revised, which most readers never notice.

A basket, priced

The Consumer Price Index, or CPI, tracks the price of a fixed basket of goods and services that a typical household buys out of pocket. Each item carries a weight reflecting its share of that spending, and the index is the weighted average of the price changes. It is a measure of consumer prices only.

Weights and shelter

The weights decide what the index actually measures. Shelter is the largest single component for most households, so housing costs do much of the work in the headline. Because the weights are fixed for a period, the index answers a precise question: how much more does this basket cost now than before?

Out-of-pocket means CPI does not count spending someone else pays for. It diverges from broader measures by construction, which is why it is compared with PCE rather than treated as the single truth about prices, and why analysts often strip out food and energy to read core inflation.

Why the basket is revised

Spending patterns drift, so the basket and its weights are updated periodically to keep the index representative. That is a feature, not a fix: a basket frozen forever would slowly stop describing what households buy. But it means two readings from different basket vintages are not perfectly comparable.

One checkable use: when CPI moves, ask which component drove it and whether the move is a base effect. A single month's reading can be dominated by one category, or by a comparison with an unusual month a year earlier. The weight and the base determine what the headline really says.

Related: Real Interest Rate · Policy Rate · Real vs Nominal

Next: PCE