The Consumer Price Index for All Urban Consumers (CPI-U) is an index that is compiled by the United State Bureau of Labor Statistics. It provides a rough measure of inflation by estimating the cost of a market basket of goods and services over time. The U.S. Consumer Price Index (CPI) is one of the most widely used economic indicators in the world because it provides a quick and convenient estimate of the purchasing power of the US Dollar over time.
The CPI is a rough measure of the cost of living over time. The exact calculation involves sophisticated economic models, but conceptually the idea is simple. A sample market basket of goods and services that a consumer might purchase is indexed in a certain year, and the price of this market basket is then tracked to see how prices change over time. Since the market basket remains fixed year after year, the CPI becomes a measure of how much money it takes to maintain a fixed standard of living.
There are two variations to the CPI, with the only difference being the type of population sampled. Historically, when the CPI was first introduced in the 1910s, the CPI included only the population of wage earners and clerical workers in urban areas. This limited population would, for example, include secretaries and telephone operators who lived in the cities. It would, however, exclude seasonal farmhands as well as professionals and managerial executives.
This index, known as the CPI-W, sampled only the wage earners among urban consumers, known as the W-population. Although the CPI-W was useful when first introduced, it eventually became desirable to include a broader sample of the U.S. population. As a result, the U.S. Bureau of Labor Statistics introduced the CPI for All Urban Consumers in 1978.
The CPI for All Urban Consumers samples from the U-population, which includes all urban consumers. With the U-population, professionals, managers, technical workers, the self-employed and the unemployed are now part of the sampled population. The methodology for calculating the CPI for All Urban Consumers is identical to that for the CPI-W, except that the U-population is much more representative of the country as a whole, with more than two-thirds of the population represented. As a result, the CPI for All Urban Consumers provides a much more comprehensive assessment of the cost of living for a typical urban American than the CPI-W does.
The CPI is often used as a convenient measurement of inflation. As the cost of the market basket increases, the purchasing power of the US Dollar decreases. Hence, the CPI is used in myriad financial transactions, with the index being closely watched by groups as diverse as economists to business executives to union workers to senior citizens. The U.S. government, for example, bases Social Security payments, income taxes, food stamp programs and employee salaries and pensions on the CPI. The CPI for All Urban Consumers even influences wages paid to union employees, because collective bargaining agreements are often based on this index.
Other countries have developed conceptually similar consumer price indices to allow cost-of-living comparisons. National CPIs and citywide CPIs have been compiled. Care must be taken in any comparison, however, because each CPI will use its own methodologies in its calculations. Even so, international CPIs offer valuable insight to see how far a consumer's money can stretch in different corners of the world.