The consumer price index (CPI) measures food; beverages; housing; apparel; transportation; medical care; recreation; education and communication; and other goods and services. It is one of the most commonly used economic indicators to measure inflation in the United States, as it calculates the cost change for a set of consumer goods and services over time. Inflation indicates the change in purchasing power of the dollar. Higher sales prices indicate a decrease of consumer purchases and rising inflation, which ultimately led to adjustments in income and cost of living – this process is called indexing.
The CPI divided into two groups to assess the change in the prices of domestic and imported, the customer-related services. The inhabitants of the city or urban areas, including professionals, self-employed, the poor, the unemployed and pensioners as measured by the consumer price index for all urban consumers (CPI-u). The wages of urban workers and employees are calculated using the consumer price index for urban wage earners and employees (CPI-W), more specific categories shifted toward more active workers and those in lower social classes
Since the CPI does not include rural or urban areas, farm families, members of the armed forces and those in institutions such as prisons and psychiatric hospitals, the U.S. Bureau of labor statistics (BLS) uses additional indexes to measure inflation. The producer price index (PPI), which measures domestic production of commodities and services serves as a leading indicator for consumer prices, when producers are faced inflation, rising production costs are passed on to retailers and consumers.
Consequently, the economy is a true measure of output; it does not depend on consumer demand. Gross domestic product (GDP) deflator measures the aggregate prices of all goods and services produced at the expense of the whole nation, covering the CPI and PPI statistics. The CPI is a sound index to measure inflation, but for a more accurate and complete measure, the consumer price index and the GDP deflator are also required.