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The Consumer Price Index
The consumer price index, or CPI,
measures the cost of the market basket of a The most widely used measure of the overall price level in the United States is the
typical urban American family. consumer price index (often referred to simply as the CPI), which is intended to
show how the cost of all purchases by a typical urban family has changed over time.
It is calculated by surveying market prices for a market basket that is constructed to
represent the consumption of a typical family of four living in a typical American
city. Rather than having a single base year, the CPI currently has a base period of
1982–1984.
The market basket used to calculate the CPI is far more com-
plex than the three-fruit market basket we described above. In
fact, to calculate the CPI, the Bureau of Labor Statistics sends its
employees out to survey supermarkets, gas stations, hardware
stores, and so on—some 23,000 retail outlets in 87 cities. Every
month it tabulates about 80,000 prices, on everything from ro-
maine lettuce to video rentals. Figure 15.1 shows the weight of
major categories in the consumer price index as of December
2008. For example, motor fuel, mainly gasoline, accounted for
3% of the CPI in December 2008.
Figure 15.2 shows how the CPI has changed since measurement
began in 1913. Since 1940, the CPI has risen steadily, although its
annual percent increases in recent years have been much smaller
than those of the 1970s and early 1980s. A logarithmic scale is used
so that equal percent changes in the CPI appear the same.
Denise Bober atically overstates the actual rate of inflation. Why? Consider two
Some economists believe that the consumer price index system-

families: one in 1985, with an after-tax income of $20,000, and an-
other in 2010, with an after-tax income of $40,000. According to
the CPI, prices in 2010 were about twice as high as in 1985, so those two families
should have about the same standard of living. However, the 2010 family might have a
higher standard of living for two reasons.
First, the CPI measures the cost of buying a given market basket. Yet, consumers
typically alter the mix of goods and services they buy, reducing purchases of products

figure 15.1

The Makeup of the Other goods
Education and
Consumer Price Index communication and services
3%
in 2008 6%
Recreation
This chart shows the percentage shares
6% Food and
of major types of spending in the CPI as
of December 2008. Housing, food, Medical care beverages
6% 16%
transportation, and motor fuel made up
about 76% of the CPI market basket.
Source: Bureau of Labor Statistics. Transportation
12%*
Housing
43%
Motor fuel
3%
Apparel
4%
*Excludes motor fuel.

144 section 3 Measurement of Economic Performance