Consumer Price Index

Let's assume you like Trader Joe's, just like me and shop there regularly. 

On one fine mid-summer morning, you go to Trader Joe's and gently walk across the aisles. You indulge in soul soothing shopping, buying a few vegetables, meat, bread, milk and wine (of course!). Now you are happy-go-merry customer and the cashier processes your items for payment and lets say your average price per item is $3.50. 

Imagine you've done this once per week, all summer. Now, come fall you continue your routine and visit Trader Joe's once a week, just like you did all summer. And let's assume you are purchasing the regular items  such as vegetables, meat, bread, milk and wine. Now, when your order is processed by the cashier, you realize the average price has changed to $3.75! And you think.... what the heck??

Consumer Price index measures the change in price level of an average basket of goods purchased by households. In this case the average price of the items purchased in Trader Joe's changed by a whopping 7.15 percent. 

Practically speaking, if we ever encounter a CPI of 7.15 percent, we are having runaway hyper inflation. Think Zimbabwe and it's 100 Trillion Zimbabwe Dollar currency note !

For the past 10 years in the United States, the Consumer price index has been relatively low (a modest 0.3-0.5 percent annually). This has been a worrisome trend for the Federal Reserve who was struggling to keep interest rates low when inflation was stubbornly low as well. Ahhhh.... those were the days pre COVID-19! :)

The Bureau of labor Statistics surveys the prices of 80,000 consumer items to create the index. It represents the prices of a cross-section of goods and services commonly bought by primarily urban households. They represent 87 % of the U.S. population.

The Bureau of Labor Statistics publishes the Consumer Price Index for every month. It is released two weeks after the end of the month and can be viewed here