The Consumer Price Index – usually shortened to CPI – is an important measure of how an economy is performing. Although different countries may use a slightly different formula to calculate their CPI, the basic principle remains the same. By using CPI to measure how much the normal cost of living is increasing or decreasing for citizens, CPI can influence government decisions, benefit and salary levels and more.

Let’s take a look at what CPI is, how it’s calculated, and why it matters so much.

What is the Consumer Price Index (CPI)?

CPI is one way governments and companies measure whether the overall cost of living is going up or down in their location. That gives an indication of the purchasing power of your dollar, pound or euro by showing how far your money will stretch to cover everyday essentials and luxuries.

The Consumer Price Index is calculated by looking at the cost of a predetermined basket of goods and services. These will include common items people buy everyday such as food or clothing, and may also feature bigger purchases like new vehicles and technology. Some countries use a CPI index which includes the costs of housing, education, medical care and transport to ensure a rounded picture. 

By measuring the prices of the same set of purchases on a monthly basis, it is possible to see how the costs change over time. This gives insight into what someone needs to spend to maintain a constant standard of living.

CPI is measured slightly differently by different countries. The focus of the measurements is tailored to the country and region the figures are produced for. This may mean the basket of goods and services looks different according to consumption patterns, or that the reporting methods vary somewhat by country.

In the US, CPI figures are produced by the Bureau of Labor Statistics (BLS), while in the UK the Office for National Statistics (ONS) provides monthly updates on CPI.

How is CPI Used?

CPI is used in a range of ways which may impact everyday individuals around the world. By measuring the cost of living, CPI is one measure of inflation, which is important to governments assessing and setting fiscal policies.

CPI is used to calculate the purchasing power of a currency, which matters when determining how much money people need in order to maintain their standard of living. For this reason, CPI can be one factor used to determine changes in benefit payments, pensions, and salaries. It can also be used when calculating levels of tax, to ensure people are not paying more for everyday life at the same time as seeing their taxes rising steeply.

Consumer price index formula

The basket of goods and services used by different countries can vary, and there will be different indexes used for different purposes even in a single country. However, the basic calculation is similar, no matter what the basket looks like:

CPI = cost of basket in current year/cost of basket in base year x 100

The base or reference year used can vary between countries. In the UK, the base year is 2015, while the BLS uses the period 1982 – 1984 for most CPI calculations. In both cases, the base year is shown as 100 – meaning that a percentage swing up will show as a number higher than 100, and a swing down from the value in the base year will be indicated with a number lower than 100.

What is the current CPI rate for 2020?

CPI rates are updated on a monthly basis, and shown in a broad variety of different ways to allow them to be widely used.

In the December 2020 update for the US, the BLS announced that the Consumer Price Index for all Urban Consumers (CPI-U) was up 1.4% before seasonal adjustment, compared to the year prior. The UK’s 12 month rolling CPI was up 0.6% in December 2020, while the calculation which also includes the costs of housing (CPIH) was up 0.8%.

You can find the latest statistics for your part of the world, including breakdowns and background information, online, with a Google search.

What is the difference between the Consumer Price Index and inflation?

CPI is often used as a measure of inflation in a country or region. However, it’s not the only available measure. Depending on what you need the information for, you might find there’s a better index to use.

CPI shows the cost of maintaining consumer purchases at the same level. It’s therefore very useful for companies setting salaries, or governments when deciding on the levels of pension or social security payments. However, other measures exist, such as the Producer Price Index (PPI) in the US, which measures costs of raw goods before they become consumer products, If you’re a manufacturer, this may be a more useful measure of your costs than the CPI, for example.

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CPI is one measure that impacts people very broadly – despite being rarely understood. From the amount in your paycheck, to the approach the government takes to spending, taxation and broad policy adjustments, CPI can make a difference. If this simple guide has got you interested, you can also learn more – and keep up with trends as they happen – online using the resources available from your local authorities. is a news site only and not a currency trading platform. is a site operated by TransferWise Inc. (“We”, “Us”), a Delaware Corporation. We do not guarantee that the website will operate in an uninterrupted or error-free manner or is free of viruses or other harmful components. The content on our site is provided for general information only and is not intended as an exhaustive treatment of its subject. We expressly disclaim any contractual or fiduciary relationship with you on the basis of the content of our site, any you may not rely thereon for any purpose. You should consult with qualified professionals or specialists before taking, or refraining from, any action on the basis of the content on our site. Although we make reasonable efforts to update the information on our site, we make no representations, warranties or guarantees, whether express or implied, that the content on our site is accurate, complete or up to date, and DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Some of the content posted on this site has been commissioned by Us, but is the work of independent contractors. These contractors are not employees, workers, agents or partners of TransferWise and they do not hold themselves out as one. The information and content posted by these independent contractors have not been verified or approved by Us. The views expressed by these independent contractors on do not represent our views.