By: Sheldon Metz, J.D.
Do you know what the federal government really loves? An acronym.
There’s just something about stringing together a bunch of capital letters that brings sweet satisfaction to elected officials.
To demonstrate, let’s play a game.
Below is a list of acronyms used by the federal government. See how many you can get right. The answers are below. No cheating!
1. CIA
2. IRS
3. FBI
4. NSC
5. CPI
6. INTERPOL
7. NORAD
8. MLARS
9. CDMRP
10. ADCOMSUBORDCOMPHIBSPAC (yes, this one is real)
Go ahead, scroll down, and check your answers. I'll wait.
How many did you get right? I know...number ten was a bit of a surprise. Well done to the U.S. Navy for coming up with a 22-letter acronym.
While the CIA, IRS, FBI and others are all important, the acronym that should keep you up at night is CPI, the Consumer Price Index. Why? Let’s learn.
The Consumer Price Index Explained
Every month the Bureau of Labor Statistics (BLS) publishes a report that “represents changes in prices of all goods and services purchased for consumption by urban households.”1
In layman’s terms, the CPI measures the inflation that consumers experience in their day-to-day lives.2 It's how much more or less expensive cost-of-living is becoming in the United States.
Think of it this way. You know that moment when you go to the grocery store and you have approximately 3 to 5 small items in your basket because you just need a couple things real quick.
So, you head over to the self-checkout (because checking out at the grocery store is your job now) and after scanning your items you immediately feel a wave of anger and sadness due to the sticker shock of how expensive this trip has become. The Consumer Price Index (CPI) measures how much more (or less) that basket of items costs.
How CPI is Calculated
The BLS determines the monthly change in price by calculating the cost of a figurative “basket” of commonly purchased goods and services. Here’s how they do it.
Over the course of a month, the BLS acquires about 100,000 price quotes from retail stores and approximately 8,000 rental housing units quotes.3 Price collection is largely done by actual people who serve as ‘CPI data collectors’ who visit brick-and-mortar stores in every region of the United States to the document the price of the goods and services.3
There are eight major categories of items included in the CPI report:
1 – Food & Beverages (breakfast cereal, milk, coffee, chicken, wine, full-service meals, snacks)
2 – Housing (rent of primary residence, owners’ equivalent rent, utilities, bedroom furniture)
3 – Apparel (men’s shirts and sweaters, women’s dresses, baby clothes, shoes, jewelry)
4 – Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
5 – Medical Care (prescription drugs, medical equipment and supplies, physicians’ services, eyeglasses and eye care, hospital services)
6 – Recreation (televisions, toys, pets and pet products, sports equipment, park and museum admissions)
7 – Education and communication (college tuition, postage, telephone services, software and accessories)
8 – Other goods and services (tobacco and smoking products, haircuts and other personal services, funeral expenses)
As you can see, it’s a fairly comprehensive list.4
The prices of items within each category are calculated as if they are purchased in one large “basket.”
The value of the basket in the current year is then divided by the value of the basket in the prior year and multiplied by 100.
Annual CPI = (value of basket in current year / value of basket in prior year) x 100
This result is reported as Annual CPI.
The annual CPI is then used to determine the inflation rate with the following equation:
Inflation Rate = [(New CPI - Prior CPI) / Prior CPI] x 100
Each month, the BLS announces the new inflation rate. It is this inflation rate that impacts everything from tax brackets, cost of living adjustments, and rent increases. In Washington, D.C. the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in fiscal and monetary policies. Social Security beneficiaries, Supplemental Nutrition Assistance Program (SNAP) recipients, and even Medicare premiums are all impacted by the inflation rate.
Bottom line, the monthly CPI report’s inflation rate impacts almost everything you as a consumer interact with in our economy.
So, the next time you hear “the latest CPI numbers,” don’t tune out – pay attention. That acronym may have an impact over your income, grocery bills, healthcare costs, funding education, and even your retirement.
Understanding how inflation is measured is the first step to understanding your financial well-being.
Our team monitors inflation data every single month and proactively adjusts strategies designed to help our clients stay ahead of rising costs.
In other words, we watch CPI, so you don’t have to.
If you’re ready to build a strategy that works to outpace inflation, let’s talk. Because in the acronym-loving world of Washington, CPI might just be the most important one to know.
If you're ready for clarity, we're ready to help.