What is CPI and how does it impact consumers?

Yahoo Finance Live's Brad Smith explains the significance of consumer price index (CPI) data and what it means to U.S. consumers amid elevated inflation levels.

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BRAD SMITH: We will get a fresh read on inflation tomorrow in the form of CPI. This will help inform the Fed's decision on whether or not to raise interest rates, but let's take a quick step back here. What does CPI actually mean? And how does it measure inflation? Well, CPI stands for Consumer Price Index. As defined by the US Bureau of Labor Statistics, CPI is the measurement of monthly change in prices paid by US consumers.

Now, the index tracks up to 100,000 goods and services per month. Key categories, they include areas like housing, food, transportation, and apparel. The Bureau of Labor Statistics, commonly known as the BLS in your neighborhood, gives each category a relative importance based on a survey of what consumers buy. 450 workers at the BLS, they're responsible for tracking all of the prices that they see, and 8,000 households is what they're tracking those across.

So now to make sure products haven't changed in price too much, they compare product, let's say eggs, for example, to a list of data points from the month before. That means these BLS workers are tracking the price of eggs from past months, based on things like its size, brand, and labeling, even.

When the prices eclipse their prior levels over an extended period of time, the Fed may conclude that there is persistent price pressure in the economy. And in an economy that is 2/3 driven by consumption, data points gathered as part of the Consumer Price Index, they provide policymakers a read into the health of the economy with relation to their own goal of price stability.