- [Narrator] Plane tickets, gasoline, groceries.
Inflation has hit the US hard.
In 2022, the consumer price index rose
at its fastest pace in more than four decades.
- So the CPI, as it's more commonly known,
is pretty much the most closely watched indicator
of inflation in the US,
and consequently, the world.
- [Narrator] The consumer price index estimates
the change in prices for a basket of goods
and services that represents the average household spending.
Calculations made from that basket
are used to make decisions
that affect Americans all over the country.
Decisions about adjusting tax brackets
and benefits like Social Security and food stamps.
And it's one of the indexes watched by officials
at the Federal Reserve.
- Against the backdrop
of the rapidly evolving economic environment,
our policy has been adapting and it will continue to do so.
- [Narrator] But how is this basket selected
and used to calculate the CPI?
And when shaping policy decisions,
why does the Fed pay the most attention
to a different index?
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The department in charge of the index,
the Bureau of Labor Statistics, or BLS,
looks at several categories,
each given a different importance
to compute the month's percent change.
Some of the most important categories
are food, transportation and housing.
- When you pull that all together,
housing is a big, I mean,
it's the biggest expense that we pay for out of pocket.
Rent, your mortgage, that's gonna be a hefty chunk
more than anything else.
- [Narrator] The BLS gives
each category its relative importance
based on a survey of what consumers buy.
Keeping track of all of those items people spend money on
and their prices changes month to month
is the job of BLS's price checkers.
The agency employs over 450 workers
who track prices for up to 100,000 goods and services
and 8,000 housing units every month
based on the survey of what consumers are purchasing.
To make sure products they are price tracking
haven't changed, they compare the product
to a list of data points from the month before.
Sometimes that list can be up to 11 pages.
This process helps to ensure the CPI's accuracy.
The BLS is basing those calculations
off of an urban consumer paying out of pocket.
The formula excludes non-direct spending,
like payments from nonprofit organizations
that provide services to households,
Medicare and Medicaid,
and employer-sponsored healthcare plans.
But again, this is just an average.
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Inflation affects different people differently.
- How you feel inflation depends a lot
on what's in your spending basket,
and how that differs from the average person's
as captured in the CPI.
If you have to drive to work every day,
you are feeling inflation a lot more
than the person who has to take the Subway
because the gas prices have gone up so much.
- [Narrator] And the index doesn't include everything.
That's why some, like the Federal Reserve,
prefer indexes they see as broader,
like the Personal-Consumption Expenditures
Price Index, or PCE.
- Over the 12 months, in April, total PCE prices,
that's Personal-Consumption Expenditures Prices rose 6.3%.
- [Narrator] One of the reasons the Fed prefers this index
is that the CPI only transitions items
in and out of the basket every two years,
while the PCE changes its basket month to month
based on consumer trends.
The variations in how CPI and PCE are calculated mean
that the two indexes
can reflect American inflation slightly differently
but the Fed takes both into account.
- The Fed's monetary policy actions
are guided by our mandate to promote maximum employment
and stable prices for the American people.
- [Narrator] Looking at multiple indexes gives the Fed
a broad picture of American inflation.
- CPI's undoubtedly something
that they're watching closely,
especially the month-on-month movement,
like that's an important gauge of it does this,
inflation we're seeing, does it have momentum?
- [Narrator] And rising inflation of vital items,
especially over long periods of time
can cause more issues,
like inflation becoming embedded in the economy.
- We at the Fed understand the hardships
that high inflation is causing.
We're strongly committed to bringing inflation back down,
and we're moving expeditiously to do so.
- [Narrator] When inflation remains high for too long,
consumers begin to change their behavior
in ways that can keep prices elevated.
- So for instance, like oh,
my bills are getting really expensive,
so I'm gonna ask for a raise
and then your boss is like people seem
to be willing to pay my higher prices,
so I'll just give this person a raise
and raise my prices.
That keeps inflation kind of chugging along
in a way that can be eventually harmful for the economy.
- [Narrator] By looking at changes to individual categories,
like housing and food,
consumers can learn specific information
from the overall CPI.
- That's gonna give you a sense of whether inflation
is broadening, and that's really the concern right now
for the economy.
- [Narrator] The CPI is a useful tool
for economists and consumers alike.
And it's a good indicator of whether inflation
will begin to subside
or whether it will become more embedded in the economy.
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