Inflation vs. Consumer Price Index (CPI), How They Are Different

The difference between the Consumer Price Index (CPI) and inflation is a source of confusion for many. At its easiest level, the Consumer Price Index in the United States is used to calculate inflation. Thus, their similarities are better understood based on that relationship even if the details of their differences are not.

Looking at definitions, the Bureau of Labor Statistics of the United States Department of Labor defines the CPI as:

"a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."

It defines inflation as:

"the overall general upward price movement of goods and services in an economy."

Unfortunately, those definitions do not thoroughly describe the nuances between the Consumer Price Index and inflation. To do that, we must elaborate on both concepts with additional detail.

To begin with, let’s look solely at the Consumer Price Index. The CPI can be viewed as a number used to measure change. In the United States, the Bureau of Labor Statistics gathers the average prices paid by consumers for hundreds of different items each month. The average is then compared to a reference base period. That base period is an arbitrary date set by the federal government. Currently, the US uses the average of goods and services from 1982 to 1984 and considers that our reference base period with a factor of 100.

We can then use the monthly CPI published by the Bureau of Labor Statistics to determine differences between two points in time and calculate inflation for that period. For example, let’s compare the CPI of January 2000 with that of January 2010.

The CPI of January 2000 was 168.800 with the index for January 2010 listed as 216.687.

To make the calculations, we take the more recent CPI, subtract the oldest CPI, and then divide by the oldest CPI. Using our numbers shown above, it would be 216.687, minus 168.800, divided by 168.800. This equals .2837.

Inflation is always considered as a percentage, so we take that number and multiply it by 100 to get 28.37%. Thus, the inflation rate from January 2000 to January 2010 was 28.37%.

By looking at these calculations, it becomes easier to understand that the Consumer Price Index is a factor in determining inflation.