October 20, 2022

The Consumer Price Index

The Consumer Price Index (CPI) is defined as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”1 The US Bureau of Labor Statistics releases the CPI every month showing both the monthly and annual change in prices of these goods and services and many view any change in the CPI as the rate of inflation throughout the US economy.

The CPI looks at price changes on all items and goods purchased by “all urban consumers” in the US, which represents about 93% of the US population.

On October 13 the latest CPI data was released, and it showed that prices rose on average 0.4% in September 2022 and 8.2% over the past 12 months. Much of the stock market volatility we have seen lately can be attributed to inflation and the uncertainty it has caused.

What goes into the CPI?

The CPI is calculated as a weighted average of the price changes of over 200 categories of goods and services covered by the index. The weight associated with each category is meant to reflect the relative importance of those goods and services to the consumer. For example, the cost of housing (owning or renting) is the largest expense for most Americans, and it will therefore carry a larger weight and have a larger impact on the calculation of the CPI each month.

Shown below are the major categories of the CPI and the weights associated with them. The largest 3 categories, Housing, Transportation, and Food account for almost 75% of the weighted CPI calculation, with Housing by far the largest. Within each category are related sub-categories. For example, the cost associated with heating a home, heating oil, and natural gas, are sub- categories within Housing and the cost of gasoline and diesel fuel are in Transportation.

Over the past year, we have seen prices rise significantly in the categories that carry the most weight in the CPI calculation and they have played a large contributing factor to the overall change of the CPI.

“A nickel ain’t worth a dime anymore” – Yogi Berra.

Gregory, Gabriella, Brian, Samer, and Chris

Prato Capital: Where Integrity Meets Discipline

1 “Consumer Price Index Frequently Asked Questions.” US Bureau of Labor Statistics. March 23, 2022.