How is Inflation (CPI) Measured?

The U.S. Government measures inflation by identifying goods and services that represent the economy and then determines a price for the “basket”. The resulting price of the basket is represented by an index known as the Consumer Price Index for All Urban Consumers1 (CPI). It then compares the price of the basket over time in order to measure the movement of prices. The basket contains 200 categories arranged into eight expenditure categories, which include food and beverage, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. Taxes that are directly associated with the specific goods are also included.

A rising CPI is an indicator of inflation, which leads to reduced purchasing power for investors. As prices of goods and services rise, your dollar will purchase less. For example, a gallon of gas cost about 86 cents in 1970. Recently, travelers have paid more than $3.00 per gallon. In order to combat inflation, the Federal Reserve will increase short-term interest rates thereby making it more costly for businesses and consumers to borrow money.

1 Additional information about the Consumer Price Index can be found at