Economy and interest rates · updated October 21, 2026
What is the consumer price index (CPI) and how is it calculated
The CPI shows what a fixed basket of goods and services costs today, compared with what the same basket cost in a reference year. Inflation is calculated from the CPI: when the index rises 5% in a year, annual inflation is 5%.
The CPI formula
- The basket
- Hundreds of goods and services, each weighted by how much households spend on it (food weighs a lot, jewelry little).
- The base year
- The year in which the index equals 100, the starting point for comparison.
Worked example
The basket cost $2,000 in the base year. Today it costs $3,000.
A CPI of 150 means prices have risen 50% since the base year.
Worth knowing
What the news follows is not the CPI level but how much it changed from 12 months earlier: that is the annual inflation rate. In the US, the Fed pays more attention to another index, PCE, which moves more slowly.
When the CPI can fool you
The basket is not yours: it is the national average. If you pay rent in a big city and drive a lot, your prices can rise faster. Tax changes: a cut in sales tax or VAT lowers the CPI without the economy having changed.
Related terms
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Questions about the CPI
What is the difference between CPI and inflation?
The CPI is the index, a level. Inflation is how much that level changed over a period, usually a year, in percent.
What is core inflation?
Inflation measured without the prices that jump around from month to month: energy and fresh food (in some measures also alcohol and tobacco). It shows the long-run trend better.
These explanations are for information only. They are not a recommendation to buy or sell.
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