The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Difference between CPI and cost-of-living:

CPI solely measures the change in the value of the “basket of goods” over time.
Basket of Goods = goods and services purchased for consumption

Some of which are:

* FOOD AND BEVERAGES
* HOUSING
* APPAREL
* TRANSPORTATION
* MEDICAL CARE
* RECREATION
* EDUCATION AND COMMUNICATION
* OTHER GOODS AND SERVICES

A cost of living measure considers the same criteria that the CPI does but in addition to CPI, the cost-of-living involves other governmental or environmental factors that affect consumers’ well-being, such as safety, education, health, water quality, crime, and etcetera.

In a nut-shell, basically what the Bureau of Labor Statistics did is they monitored a large group of consumers from 1982 to 1984. They assessed what items were bought by the consumers in the group, what items were bought more often than others, and what the prices of such items were. They choose the most common items amongst those surveyed, gave them specific weights, and set the base index for the sum of the goods to 100. They continued to monitor the prices of the selected goods on a monthly basis and calculated what the current consumer price index would be.

For example:

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This example data shows that the CPI increased by 35%, thus one could expect to spend 35% more on typical goods and services in 1992 versus 1982. I.E., if you had a $100 bill that was left in the pocket of a Members Only jacket in 1982 and you didn’t find it until 1992. You would pretty much only would’ve had the spending power of $65 ($100 minus 35% of $100), according to the example above.

Now, on to real numbers: In the Midwest, the CPI in July of 2008 was 210.071 and for July 2007 it was 198.989. This means that that the current inflation rate in the Midwest is 5.56%.

It is imperative that we as consumers beat inflation, whether it is with choice investments or demanding a cost-of-living salary increase, or more. If your income/investments don’t at least keep up, you are losing money.

References:

www.bls.gov
www.inflationdata.com