Once a month, the U.S. Bureau of Labor Statistics releases a single number that moves stock prices, shapes Federal Reserve decisions and determines the yearly raise for tens of millions of Social Security recipients: the change in the Consumer Price Index. It is the most widely followed measure of inflation in the country.

It is also widely misunderstood. Here is what it measures and what it doesn’t.

What the CPI measures

The CPI tracks the average change over time in the prices that urban consumers pay for a fixed “basket” of goods and services. If the basket costs 3% more than it did a year earlier, annual inflation is 3%.

The basket is meant to reflect what households actually buy. It covers hundreds of categories, from rent and gasoline to haircuts, airline fares, prescription drugs and breakfast cereal, grouped into major areas such as food, energy, housing, apparel, transportation, medical care, recreation and education.

How the prices are collected

Every month, BLS data collectors record prices for tens of thousands of items at stores, websites and service providers across the country, and housing information from a large sample of rental units. Each category is weighted by how much consumers spend on it, using data from a separate government survey of household spending. A category people spend more on counts more.

Housing is the biggest piece

Shelter is the largest single component of the CPI, roughly a third of the index. For homeowners, the BLS doesn’t use house prices directly. Instead, it estimates what owners would pay to rent a similar home, a measure called owners’ equivalent rent, because a house is treated as an investment as well as a place to live.

Because rent leases renew slowly, the shelter component reacts to the housing market with a long delay. Changes in market rents can take many months to show up fully in the CPI.

Headline vs. core

  • Headline CPI includes everything.
  • Core CPI excludes food and energy, whose prices swing sharply with weather, harvests and global oil markets.

Core inflation is not “inflation without the things people care about.” Economists watch it because it gives a clearer view of underlying trends, while headline inflation shows what households are actually paying right now.

Different versions of the CPI

  • CPI-U covers all urban consumers, the great majority of the population, and is the version usually quoted in the news.
  • CPI-W covers households of urban wage earners and clerical workers. It is used to calculate the annual Social Security cost-of-living adjustment, which for 2027 is a 3.6% raise.

Why the Fed watches a different number

The Federal Reserve’s 2% inflation target is measured with a different index, the personal consumption expenditures (PCE) price index, published by the Commerce Department. PCE covers a broader range of spending, including what employers and the government pay for health care on people’s behalf, and it adjusts more quickly when consumers switch between products. It usually runs a little below the CPI. Read more in our guide to what the Federal Reserve does.

Why your inflation feels different

Nobody lives in the average basket. A renter in a fast-growing city, a retiree with high medical costs and a commuter who drives 50 miles a day will each experience inflation differently. Prices people pay often, like groceries and gas, also shape perceptions more than items bought rarely, even if those rarely bought items weigh more in the index.

There is also a difference between inflation slowing and prices falling. When inflation drops from 6% to 3%, prices are still rising, just more slowly. They rarely go back to where they were.

What we think

The CPI is a careful, transparent measure of average price changes, and its methods are published in detail. But it is an average, and it can’t capture any one family’s budget.

When the next report comes out, look past the single monthly number. The trend over several months tells you more, and the shelter, food and energy pieces tell you which costs are driving it. That is what matters for decisions about saving, borrowing and asking for a raise.