The Consumer Price Index indicates how much prices of consumer goods and services have increased over a set period of time. Typically, the CPI measures a percentage rate of change over one year. In the United States, an updated figure is released by the U.S. Bureau of Labor Statistics (BLS) each month. While the CPI is similar to a cost-of-living index, it actually provides a broader overview of the nationwide economy.

In addition to maintaining the index, the BLS also updates the CPI methodology in response to changes in products and spending patterns; sources the raw pricing data for monthly tabulation; and surveys tens of thousands of U.S. urban consumers each year to find out what they’re spending their dollars on. As new products and whole new categories of spending arise in an economy over time, they are added to the CPI market basket of goods—or the mix of goods and services used during calculations—and their prices are tabulated. The BLS records the current price of each item each month and notes whether it has fallen or risen since the previous month. 

While the CPI is reported as a single figure, it represents the aggregate of more than 200 product and service categories and 80,000 individual items. Each category is weighted based on the amount of money the BLS estimates the U.S. population spends on that category each month. 

When goods have quality improvements (such as computers and cars) or there is a market-wide package, size, or price changes, the CPI data represents these changes in value while still comparing the prices to those of the “same good” from the prior month’s measuring period. 

Two additional figures, the Consumer Price Index for All Urban Consumers (CPI-U) and Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) specifically measure price increases or decreases in for different population groups in urban metropolitan areas.

The CPI is the single most-utilized figure when discussing or assessing the inflation rate.The CPI also helps determine the annual cost of living increases for pension and Social Security payments and government employees’ salaries. Additionally, the CPI is also used to calculate annual investment product changes and insurance payouts that are tied to inflation.

As the most utilized economic indicator, the CPI also sets the bar for monetary policy and interest rates, affecting everything from bonds and credit card annual percentage rate to variable mortgage interest and prevailing mortgage rates for fixed mortgages.
All advanced economies around the globe calculate their own CPI. More information about the CPI can be found at the Bureau of Labor Statistics.

Whether the CPI truly captures real inflation or deflation is a hotly debated issue. But while the CPI will never be perfect—even the BLS says as much—it is our best-educated guess about whether prices are broadly rising, falling, or remaining stable. Congress, the White House, and the Federal Reserve banking system use the CPI to steer the enormous ship of the U.S. economy. 

For example, if the Federal Reserve Board saw a spike in the CPI for several months in a row, indicating rapidly rising prices, they could take action to limit the damage to the economy.

It’s important to note that CPI captures only prices paid by the end consumer; there is a separate measure of inflation called the Producer Price Index (PPI) which captures price increases paid at the beginning and intermediate phases of the production process—for example, by the companies that make cardboard boxes which are then sold to Amazon and FedEx. 

The CPI is intimately tied to interest rates. The higher the CPI in year-over-year percent changes, the higher the prevailing interest rates will be. If the CPI has only risen two percent in the past 12 months, chances are good that interest rates on benchmarks like the 10-year U.S. Treasury will be on the lower end. 

But if the CPI starts to spike higher, even for a couple of months—CPI is reported monthly—interest rates will quickly rise as well. Mortgage rates have an extremely high correlation to interest rates; mortgage rates will rise within weeks, if not days, if there is a spike in prevailing U.S. treasury rates, and typically increase by a similar amount. 

Real estate investors should consider a few essential things when mortgage rates are rising. First, rising interest and mortgage rates can indicate a strong economy. As demand for goods and services by consumers goes up, companies can and do raise their prices. This applies to everything from candy bars to televisions to houses. So when interest rates rise, more often than not real estate values increase as well. 

However, there’s a fine line between strong real estate demand for real estate and mortgage rates increasing so much that people are nervous to take out a loan. The same is true in the converse: Falling interest rates can spur real estate demand for a while, but if interest rates are falling because of a poor economy, eventually that demand will wane and real estate prices could actually fall.