Definition of Consumer Price Index (CPI) and How to Measure It

The definition of the Consumer Price Index or what is often called the CPI can be translated into Indonesian as a consumer price index. The consumer price index itself is the most anticipated thing by traders. This is because the index published every month by the United States Bureau of Labor Statistics has an important role in determining inflation.

Meanwhile, according to the official website from Investopedia , CPI can be very useful for determining the cost level at a fixed price unit. CPI can also be an indication of an average level of goods and services. This is commonly referred to as a representative group of the average consumer purchases.

For those of you who are curious about what the Consumer Price Index (CPI) means, Gramedia will discuss it in depth for you. Not only understanding, this article will also discuss how to measure it to its use in real life. Come on, see the full review below!

Definition of Consumer Price Index (CPI)

As previously explained, the Consumer Price Index or commonly abbreviated as CPI is a measuring tool to assess the average change in the price of goods and services that is considered very important. CPI itself can be measured or calculated by monitoring price changes for each item.

CPI will generally be published every month after the assessment. This makes the data published this month the result of the CPI assessment in the previous month. The data will then be processed to measure the inflation rate that occurs every year.

Even so, the CPI data results will usually be published every month. However, there are also several countries that prefer to store this data and publish it to the public every three months. Some of these countries include Australia and New Zealand.

The occurrence of inflation in a country can easily provide changes to the fiscal policy that applies to a country. Apart from using the CPI, there are several other economic indicators that are used to assess the significance level of inflation, starting from the individual consumption index, producer prices, imported goods prices, labor cost index, to unit labor costs.

For example, large countries like the United States use additional measurement tools to calculate the inflation rate. The additional measurement tool used is Personal Consumption Expenditures (PCE) or Personal Consumption Expenditures data.

In contrast to the United States, countries in Europe will tend to use the Harmonized Index of Consumer Prices (HICP) or the Harmonized Consumer Price Index in assessing the inflation rate in their country.

Types of Consumer Price Index (CPI)

There are two types commonly used to measure CPI, including family groups or urban individuals called CPI-U (consumer price index for all urban consumers) and office workers called CPI-W (consumer price index for urban wage earners and clerical workers). workers). The following is an explanation of the two types of CPI:

1. CPI-U (consumer price index for all urban consumers)

CPI-U is a consumer price index for all urban family groups or individuals who are commonly called urban. This index is the largest because it represents 88% of the United States population with a better representation of the general public. The United States Bureau of Labor Statistics made improvements to the CPI measurement in 1978 by introducing a wider target population.

This type of CPI itself is based on spending, which is mostly from the entire population who live in urban or metropolitan areas. In addition, CPI-U also covers several professions, such as professionals, entrepreneurs, even those who are unemployed and retired.

2. CPI-W (consumer price index for urban wage earners and clerical workers)

The CPI-W can be understood as a consumer price index for urban wage earners and clerical workers. The CPI measurement based on this group of office workers began to become the focus of the United States Bureau of Labor Statistics around 1913 to 1977.

The CPI-W measurement itself is based on households that have more than half of their income from administrative work. In addition, the CPI-W also covers groups where one of the recipients has been employed for approximately 37 weeks over 12 months.

CPI-W reflects changes in the cost of benefits paid to Social Security users. The CPI measurement accounts for at least 28% of the country’s population.

How to Measure Consumer Price Index (CPI)

The Consumer Price Index (CPI) is basically a change in the average price among consumers for certain types of goods and services. In the United States itself, the method used to measure CPI is divided into the two largest population groups, namely between urban family groups or individuals called CPI-U (CPI-Urban) and office workers called CPI-W.

Meanwhile, the Bureau of Labor Statistics (BLS) or the United States Bureau of Labor Statistics is the basic reference for comparison using the average price fluctuation for 36 months. The basic comparison reference value used as the reference is 100.

Then, BLS uses measurements with formulas made with reference to the reference base numbers. For example, if the CPI is 110, there is an average price increase of 10%. Meanwhile, if the CPI value is 90, it means that there is an average price decrease of 10%.

The results of the assessment cannot be used as a reference for detailed data and collected as a whole. However, these results are sufficient to assume that the price level changes are representative of the two large population groups in the United States, namely the family group (CPI-U) and office workers (CPI-W).

Categories of Goods and Services that Can be Measured by the Consumer Price Index (CPI)

In the Consumer Price Index (CPI), there are at least eight categories of goods and services that can be measured or assessed. Some categories of goods or services include basic materials for housing or residence, food and drink, transportation, health, clothing, entertainment and recreation, education and communication, and various other goods and services.

Types of Inflation Data

Based on the Consumer Price Index (CPI) assessment, two inflation data were found, including the following:

1. Prime inflation

The Consumer Price Index (CPI) will include various information related to changes that occur as a whole, starting from energy prices to fluctuating prices.

2. Core inflation

The Consumer Price Index (CPI) will also process various information without fluctuating energy and food prices. However, CPI only produces a clear picture of changes in the price of an item.

Furthermore, the data that has been loaded from the main inflation tends to be more volatile. This is because headline inflation covers all information and is able to predict core inflation. Main inflation is also compiled so that it can be the best benchmark for inflation. In addition, the main inflation will usually also be targeted by the central bank in the local country.

The inflation data itself included in the CPI will have the potential to change the market in the short term. In fact, inflation data can also have an impact on the creation of a particular monetary policy. Therefore, the Central Bank will often be required to be able to target the inflation that occurs.

An indicator that has a very important role in the money market, namely the Consumer Price Index. The value listed in the CPI is very important because there is a relationship between labor growth and the inflation rate in a country.

It should be noted that the inflation rate is considered quite sensitive because it determines the price that must be paid by consumers in obtaining a product or service. If the price is at a high or expensive level, then the business climate will be greatly affected in increasing costs.

The Importance of Consumer Price Index (CPI)

Consumer Price Index (CPI) data is considered important because it can show how quickly the prices of goods and services increase. When prices rise, it can be interpreted that inflation is occurring. Meanwhile, when prices are stable, it means deflation will occur.

The inflation rate itself will be used by the central bank as a guide in determining a policy, such as increasing, decreasing or maintaining interest rates. This is done to stimulate or restrain the expenditure of funds by consumers so that in the end it has an impact on the inflation rate.

This CPI data will be covered and monitored by several related parties, large and continuous fluctuations in inflation rates will affect the central bank in determining monetary policy.

For now, most central banks will target inflation at home. This means that there is a specific inflation rate target that must be achieved by the central bank. One of the things being done to support this target is that the central bank will utilize interest rates and monetary policy tools to control price stability in the market.

Impact of Publishing Consumer Price Index (CPI) in the Market

When the Consumer Price Index (CPI) data is published, it will affect many banks, one of which, of course, is the need to cut interest rates. It doesn’t stop there, there are several banks that have become negative so that they need other tools in conducting assessments, such as quantitative easing to provide stimulus to consumer spending. This was done to trigger higher inflation.

However, the impact of publishing CPI data is not always negative. There are several examples that can illustrate the positive impact associated with the release of inflation data, including the Bank of Japan and the European Central Bank. The two banks have succeeded in pushing the inflation rate to the target that has been entrusted.

Therefore, when the inflation report is issued every three months will show an increase or decrease. This allows the market to speculate more quickly regarding the policies set by the central bank. A businessman will usually know and understand that when prices are high, they will generate higher income.

What’s more, when the company’s profits increase, the share price will also increase so that it has the potential to increase the wealth of the assets of investors. Not only that, the company will also be healthier if it experiences an increase in revenue.

Even so, inflation is still a scary dream. This is due to the potential for instability to occur which can trigger distortions in a country’s economy. The policy that is usually set to overcome this is not to increase the price of goods, but to increase production volume more.

In addition, losses are also one of the threats that companies will face in the event of inflation. This loss will be more visible if the distributors or suppliers prefer to increase the price of basic commodities. Several other burdens may experience an increase, namely when workers demand an increase in salary to be able to meet the increasing cost of living.


Based on the explanation above, the Consumer Price Index (CPI) can be concluded as a tool used to measure or assess the average change in the price of goods and services. In addition, CPI changes can also be used to assess price changes related to the existing cost of living. The value of the CPI itself has a very important role because it is one of the most widely used references to determine inflation and deflation.

CPI measures the average price change over time when consumers pay for goods and services or commonly known as inflation. CPI basically provides a solution for assessing the overall price level in an economy. Therefore, the average measurement of the prices of goods and services that are close to individual consumption patterns is a guideline for calculating the CPI.

However, a measure of the variation in the price of retail and other goods based on payments made by consumers, the CPI excludes items such as savings and investment, and usually excludes spending by foreign visitors.

CPI can be said to be an economic indicator. It is not surprising that this tool has become the most widely used and effective in overcoming government economic policies. CPI itself has contributed a lot of ideas to governments, businesses and citizens about various price changes in the economy. Apart from that, CPI can also act as a guide to make the right decisions about the economy.

Meanwhile, CPI and other constituent components can also be used as a deflator for other economic indicators, such as retail sales, hourly or weekly earnings. Plus, CPI can be used to assess consumer dollars as well as find out their purchasing power. The purchasing power of the dollar will usually decrease when the overall price level increases and of course it can also be the other way around.

However, regardless of the positive or negative impacts of inflation, you need to know that inflation is an economic condition that occurs regularly in every country with its own currency. Inflation is not always scary, for some parties, inflation has proven to be able to provide benefits. Therefore, as a party heavily affected by market prices, one must understand the main causes of inflation as well as how to deal with it appropriately.

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