The January inflation report released this month showed that while progress continues, some prices remain stubbornly high, signaling that the Federal Reserve has more work to do. The Consumer Price Index for all urban consumers rose by 6.4% in January over the same period in 2022. That compares with 6.5% in December and down sharply from the 9.1% reported last June, but still a long way from the central bank’s 2% target.
While there are several different gauges of inflation, the Consumer Price Index is by far the most familiar and widely used to measure prices, adjust income payments like Social Security and recalibrate tax brackets and retirement contribution limits. Given its importance to virtually every American, it helps to understand a little about how the index is constructed.
The earliest efforts to collect price data in the United States began with the creation of the Bureau of Labor in 1884, tasked with conducting an analysis of family expenditures and retail prices. The first study concluded in 1890 and established the infrastructure to support systematic income and price measurement. In response to rapidly escalating inflation as the U.S. entered the Great War in 1917, the Bureau expanded its collection efforts and refined its methodology, producing the first “cost of living” index for 32 individual cities in 1919. In 1921 the agency, now known as the Bureau of Labor Statistics, began publishing a national price index, the forerunner of the current Consumer Price Index.
The computation of the monthly Consumer Price Index is a monumental task. The work begins with the specification of a market basket of representative goods and services consumers typically buy, based on a survey of 36,000 households. The market basket contains individual items from 200 categories summarized into eight broad headings such as food and beverages, medical care, housing and transportation.
Next, the Bureau of Labor Statistics collects about 94,000 separate prices for goods and services from 75 urban areas each month, with about two thirds of the prices obtained in person by visiting brick-and-mortar stores and the rest by telephone or website.