The Consumer Price Index (CPI) measures the prices of goods and services households regularly purchase, like food and beverages, housing, transportation, medical care, and recreation, among other things. Collectively, these things are called the “Market Basket” whose prices are measured each quarter, and have been for over 100 years, to measure inflation that’s experienced by US households.
While the CPI is a de facto measure of inflation, it plays an important role outside of purchases on things like employee wages, taxes, retiree income, and even federal programs.
Employee Wages: Often times, when employees receive raises, the raise amounts are determined—formally or informally—by a cost-of-living adjustment, AKA the CPI. Since it’s used to determine the rate of inflation over a period of time, it additionally measures the cost-of-living households face. Next time you hear about the Consumer Price Index, it may help you figure out what to expect, or ask for, when it comes to raises.
Taxes: Like employers, the IRS uses the CPI to help determine the data’s impact on your paycheck. The IRS uses the CPI to determine if, and to what extent, the tax brackets should be adjusted to reflect the adjustment to the CPI—especially as it relates to those cost-of-living adjustments.
Retiree Income: The Social Security Administration uses The CPI to administer Social Security benefits to almost 48 million retirees. The CPI serves as a benchmark for any modifications that may need to be made to the fixed income of retired individuals. If the CPI increases 1.5%, it may mean the Social Security benefit raises 1.5% too.
Federal Programs: Many federal programs, like the National School Lunch Program, use the CPI data to determine the cost of the program and the amount of payments made to support the program. These changes may impact the real cost individuals face, say when purchasing a school lunch, or the amount of the federal budget allocated to support the program.
The Consumer Price Index certainly has more uses beyond the cost of goods and services, and may just have a positive impact on your take-home pay. If you’d like to read more about the CPI, its uses, and how it’s collected, visit the Bureau of Labor Statistics.