The Consumer Price Index — a monthly measure of the average change in prices paid by urban consumers for a fixed basket of goods and services.
The Bureau of Labor Statistics publishes two main CPI measures: CPI-U (all urban consumers, ~93% of the US population) and CPI-W (urban wage earners). Markets focus most heavily on "core CPI," which excludes food and energy prices due to their volatility, to read underlying inflation trends. The CPI report is released monthly and is invariably a major market-moving event.
CPI measures prices across eight categories: food, energy, shelter, apparel, transportation, medical care, recreation, and education/communication. Shelter — primarily "owners' equivalent rent," an imputed measure of what homeowners would pay if renting their own home — is by far the largest component at roughly 35% of the index. Because OER is calculated using lagged rental data, shelter CPI often continues rising for months after actual market rents have peaked, complicating inflation forecasting.
While CPI is the most widely cited inflation gauge, the Federal Reserve's preferred measure is PCE. PCE tends to run slightly below CPI because it uses a chain-weighted formula that adjusts for consumer substitution behavior. Knowing this distinction is important when evaluating whether inflation is above or below the Fed's 2% target.
This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.