- [Narrator] Plane tickets,
gasoline, groceries. Inflation has hit the US hard. In 2022, the consumer price index rose at its fastest pace in
more than four decades. - So the CPI, as it's more commonly known, is pretty much the most
closely watched indicator of inflation in the US, and consequently, the world. - [Narrator] The consumer
price index estimates the change in prices for a basket of goods and services that represents
the average household spending. Calculations made from that basket are used to make decisions that affect Americans
all over the country. Decisions about adjusting tax brackets and benefits like Social
Security and food stamps. And it's one of the indexes
watched by officials at the Federal Reserve. - Against the backdrop of the rapidly evolving
economic environment, our policy has been adapting
and it will continue to do so. - [Narrator] But how
is this basket selected and used to calculate the CPI? And when shaping policy decisions, why does the Fed pay the most attention to a different index? (playful music) The department in charge of the index, the Bureau of Labor Statistics, or BLS, looks at several categories, each given a different importance to compute the month's percent change. Some of the most important categories are food, transportation and housing. - When you pull that all together, housing is a big, I mean, it's the biggest expense that
we pay for out of pocket. Rent, your mortgage, that's
gonna be a hefty chunk more than anything else. - [Narrator] The BLS gives each category its relative importance based on a survey of what consumers buy. Keeping track of all of those
items people spend money on and their prices changes month to month is the job of BLS's price checkers. The agency employs over 450 workers who track prices for up to
100,000 goods and services and 8,000 housing units every month based on the survey of what
consumers are purchasing. To make sure products
they are price tracking haven't changed, they compare the product to a list of data points
from the month before. Sometimes that list can be up to 11 pages. This process helps to
ensure the CPI's accuracy. The BLS is basing those calculations off of an urban consumer
paying out of pocket. The formula excludes non-direct spending, like payments from nonprofit organizations that provide services to households, Medicare and Medicaid, and employer-sponsored healthcare plans. But again, this is just an average. (till beeping) Inflation affects different
people differently. - How you feel inflation depends a lot on what's in your spending basket, and how that differs
from the average person's as captured in the CPI. If you have to drive to work every day, you are feeling inflation a lot more than the person who has to take the Subway because the gas prices
have gone up so much. - [Narrator] And the index
doesn't include everything. That's why some, like the Federal Reserve, prefer indexes they see as broader, like the Personal-Consumption Expenditures Price Index, or PCE. - Over the 12 months, in
April, total PCE prices, that's Personal-Consumption
Expenditures Prices rose 6.3%. - [Narrator] One of the reasons
the Fed prefers this index is that the CPI only transitions items in and out of the basket every two years, while the PCE changes
its basket month to month based on consumer trends. The variations in how CPI
and PCE are calculated mean that the two indexes can reflect American
inflation slightly differently but the Fed takes both into account. - The Fed's monetary policy actions are guided by our mandate to
promote maximum employment and stable prices for the American people. - [Narrator] Looking at
multiple indexes gives the Fed a broad picture of American inflation. - CPI's undoubtedly something that they're watching closely, especially the month-on-month movement, like that's an important
gauge of it does this, inflation we're seeing,
does it have momentum? - [Narrator] And rising
inflation of vital items, especially over long periods of time can cause more issues, like inflation becoming
embedded in the economy. - We at the Fed understand the hardships that high inflation is causing. We're strongly committed to
bringing inflation back down, and we're moving expeditiously to do so. - [Narrator] When inflation
remains high for too long, consumers begin to change their behavior in ways that can keep prices elevated. - So for instance, like oh, my bills are getting really expensive, so I'm gonna ask for a raise and then your boss is like people seem to be willing to pay my higher prices, so I'll just give this person a raise and raise my prices. That keeps inflation
kind of chugging along in a way that can be eventually
harmful for the economy. - [Narrator] By looking at
changes to individual categories, like housing and food, consumers can learn specific information from the overall CPI. - That's gonna give you a
sense of whether inflation is broadening, and that's
really the concern right now for the economy. - [Narrator] The CPI is a useful tool for economists and consumers alike. And it's a good indicator
of whether inflation will begin to subside or whether it will become
more embedded in the economy. (dramatic music)
(items beeping)
