Many have been remarking that it is becoming more expensive to maintain an acceptable quality of life. Along with record inflation, increasing wealth inequality, skyrocketing real estate prices and much more, people are truly feeling the effects of the cost of living rising considerably. The effect on everyday people is one of the main reasons economists and market watchers are interested in gauging the changes in living costs. The Consumer Price Index (CPI) is the most commonly accepted method for measuring the costs of living.

History of the CPI

Involvement in the first World War initially prompted the U.S. government to create the CPI in order for the Shipbuilding Labor Adjustment Board to utilize data from the Bureau of Labor Statistics (BLS) to determine a fair wage for shipyard workers. The U.S. government realized the workers’ labor was essential for the war effort and wanted to ensure labor strikes did not erupt as a result of wages being too low. Later the BLS started to collect price data from various other industries and began compiling data related to household spending on goods and services. 

A prototype of the CPI was created when the BLS started to publish the collected price data and presented it in a similar way to how the CPI is formatted today. Initially, the new economic indicator was named the Cost-of-Living Index when it was first published in 1921. It was later renamed to the Consumers’ Price Index for Moderate Income Families in Large Cities and then finally the name was changed to the Consumer Price Index.

How the CPI works

Nowadays, the CPI is generated by calculating the changes in prices consumers pay for a particular set of goods and services that is intended to be representative of overall spending by U.S. consumers. The BLS collects price data from 94,000 items from around 23,000 retailers and service providers. Surveys from 43,000 rental units are also collected to reflect the change in costs of housing. The BLS will compile and release the data and the calculated index once per month.

How is the CPI utilized?

The CPI is used by investors, traders, businesses, consumers, and the Federal Reserve to gauge the inflationary pressures within the economy. Business and consumers may look at the CPI to make financial decisions based upon the perceived inflationary trends. The Federal Reserve looks at the CPI along with various other economic indicators in order to adjust monetary policies. 

Traders and investors will look at the CPI in order to predict future price fluctuations in asset markets. The price of stocks and other financial assets will react to changes or perceived future changes in Federal Reserve monetary policy. Market participants, in many instances, are looking at CPI and other inflationary gauges to gain insight into how the Federal Reserve may react to developing economic trends. 

Mitigating an increase in cost of living

There are various ways consumers and investors can minimize the negative consequences of rising inflation. As a consumer you can take a close look at your personal budget and start looking for expenses you may want to reduce or completely cut out. Investors can move capital into assets that tend to retain more value during times of high inflation in the economy.