Consumer Price Index (CPI)
A US government index tracking the average change in prices urban consumers pay for a basket of goods and services.
Inflation rate = CPI(later) ÷ CPI(earlier) − 1
Explanation
The Consumer Price Index is published each month by the Bureau of Labor Statistics (BLS). It tracks the price of a fixed basket of goods and services, including housing, food, energy, medical care, transportation and more, and reports it as an index number. The change in the index over a period is the inflation rate for that period.
There are several versions:
- CPI-U covers all urban consumers and is the headline number in the news.
- CPI-W covers urban wage earners and clerical workers. Social Security cost-of-living adjustments (COLAs) are based on it.
- Chained CPI-U (C-CPI-U) accounts for people switching to cheaper substitutes. Since 2018, federal tax brackets, the standard deduction and many other tax amounts are indexed using chained CPI, which tends to rise slightly more slowly than CPI-U.
- Core CPI excludes food and energy, which are volatile.
CPI is an average. Your own inflation rate depends on what you buy; retirees, for example, often spend more on health care, which has historically risen faster than CPI overall.
In scenarios, the inflation assumption you choose plays the role of CPI. Some amounts in the app (like tax brackets) are indexed by it in future years, while a few fixed-by-law thresholds, such as the NIIT income threshold, are not indexed at all.
Example
Suppose (illustrative values) the CPI-U was 300.0 a year ago and is 315.0 today.
- Inflation rate: 315.0 ÷ 300.0 − 1 = 5.0%
If you wanted your $50,000 salary to keep pace, you would need $50,000 × 1.05 = $52,500.
Over longer periods, if CPI rose at a steady 2% a year from 300.0, it would reach 300.0 × 1.02^10 = 365.7 after ten years, a cumulative price increase of about 21.9%.