As a shopper, you’re aware when prices on things you normally buy go up or down. You experience it at the supermarket, the gas station, when shopping for clothes or anywhere else you spend money, and will then make decisions to fit your budget. If a can of your favorite soup is normally $3.50, you may pile your cart with it when it’s $1.99, but pass on it when it’s $5.
The Consumer Price Index (CPI) can affirm your feelings and reactions. It measures price movement on hundreds of products and services over a given period of time, from months to years.
For politicians and economists, the CPI is an indicator that gauges the efficacy of economic policy. It can serve as a signal to the Federal Reserve, the central bank of the United States, to make interest-rate adjustments, which can stimulate the economy or control inflation.
[READ: Inflation Calculator: See How Much Inflation Is Costing You]
The CPI Tracks Price Fluctuations on Common Purchases
The U.S. Bureau of Labor Statistics produces the CPI, which monitors changes in the price level of a basket of consumer goods and services in the urban market (CPI-U). Although certain areas are exempt from data collection, such as rural and farming communities, the CPI-U covers over 90% of the U.S. population.
The index tracks eight major categories:
— Food and beverages
— Housing and apparel
— Transportation
— Medical care
— Recreation
— Education
— Communication
— Other goods and services
More than 200 products and services fall within these groups. For example, food and beverages consist of everything from supermarket staples like dairy products, meats and bakery items, as well as restaurant meals and alcoholic beverages. Medical care spans pharmaceuticals to hospital services.
The CPI shows the average rise or fall in prices for major categories, as well as for individual items.
As an example, the CPI report for August 8, 2025, found that the average price of all items over the last 12 months increased 2.7%, but there were vast differences in specific products and services. Full-service meals rose by 3.9%, for instance, while gasoline fell by 9.5%.
Gabe Krajicek, CEO of Kasasa, a fintech company headquartered in Austin, Texas, that works with small banks and credit unions, says the CPI is like a pulse check on the cost of living. “It’s important because it helps us understand inflation — whether our money is going further or if prices are squeezing us.”
[Related:Tips to Make Ends Meet During High Inflation]
The CPI and Your Purchasing Power
When income doesn’t keep pace with inflation — which is when the cost of goods and services increases over a measured period — your purchasing power declines.
Imagine that your monthly take-home pay is $3,000 and your expenses are typically $2,500. That puts you in a financially healthy position because you could comfortably buy what you want and save $500. But if inflation rises so that those expenses are now $2,900 and your income remains the same, your savings shrink to $100. If inflation spikes, you’ll need to cut back on spending or take steps to augment your income.
Why prices escalate depends on a wide variety of factors. There could be seasonal changes, higher production costs or changes in product demand. Consumer products that rely heavily on raw materials or have significant transportation costs may experience drastic price fluctuations. Increased fuel prices can directly impact the cost of goods that require shipping, affecting the supply chain.
Major policy changes, such as high tariffs on goods imported from global trade partners, can make those items far more expensive, since merchants may pass on the increased taxes to consumers.
Health concerns can also trigger significant price swings. For example, egg prices reached a record average high of $6.23 a dozen in March 2025, due to widespread avian influenza. By July 2025, the average cost was back down to $3.60.
Everyone can benefit from paying attention to changes in the CPI,” says Shawn DuBravac, a Washington, D.C.-based economist, author and consultant. “Inflation ultimately erodes your ability to buy things. If it is rising quickly, it will affect your ability to buy core things you need on a daily basis.”
Inflation and Interest Rates
Inflation can wreak havoc on your personal budget and on the economy at large. When the majority of consumers reduce or stop spending because their expenses have become unaffordable, economic growth slows and unemployment can rise. When this goes on for too long, it can trigger a recession.
“The Federal Reserve keeps a very close eye on inflation,” DuBravac says. “When it gets too low or too high, policymakers get anxious. The Fed has two mandates: to keep near full employment and price stability. They need to keep inflation from accelerating quickly, so it’s predictable and to preserve purchasing power.”
As a strategy to temper inflation, the Federal Reserve may raise or lower the Federal funds rate, which is the target rate banks can borrow and lend their excess reserves to one another overnight.
When inflation rises rapidly, the Federal Reserve may decide to increase the Federal funds rate, which can slow the rate of inflation. To attract customers, businesses may cut prices, which can help bring inflation down.
It’s a delicate balancing act, since higher interest rates also make it more expensive for both consumers and businesses to borrow money.
Alternatively, when the economy needs to be stimulated, the Fed may lower interest rates. This can stimulate borrowing and spending, since loans and credit lines will be more affordable.
Interest Rates Affect Spending and Saving
Because lower interest rates reduce the cost of borrowing, you can finance expensive purchases without having to pay excessive fees. In general, this is positive for the economy and consumers.
“You might see more activity on big-ticket items and categories such as home purchases and auto sales,” Krajicek says. “Categories like home furnishings, consumer electronics and travel might also see a rise, as consumers feel more confident in spending.”
There are downstream effects, though. Housing and rental prices may also increase when interest rates decrease due to greater demand for mortgages, Krajicek adds.
And when you earn less interest on the money you save, setting cash aside for the future can become less appealing. That can shift your spending patterns toward consumption over savings.
Conversely, higher interest rates may lead you to reduce borrowing and spending. After all, when you know you can earn a great rate on high-yield savings accounts, money market accounts and certificates of deposit, socking cash away makes more sense.
[Related:U.S. Inflation Rates Over Time and the Forecast for the Rest of 2025]
Keep an Eye on the CPI — And Adjust Your Financial Plan Accordingly
Data from the CPI can help you spot pricing trends that you already experience in real life or that you haven’t noticed yet. If the cost of airfare is unusually low or your favorite restaurant has bumped up its menu prices, you can compare it to the official numbers gathered and reported by the BLS.
“Inflation gauges are beneficial for consumers to watch,” DuBravac says. “They help people see when prices are rising and to what extent. For a savvy consumer who is watching inflation rates, it can help them make more informed purchasing decisions. It adds context to your decisions so that you can be more intentional in your spending, saving and investing.”
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The Consumer Price Index and Your Money originally appeared on usnews.com
Update 08/21/25: This story was published at an earlier date and has been updated with new information.
