What is the Consumer Price Index?

The Consumer Price Index (CPI) measures how prices of typical goods and services change over time. Statistics offices define a basket of items that represents the spending of an average household. They observe price changes, weight them by their share in the household budget, and compute the index. The percentage change of the index is the inflation rate. In the EU, the Harmonised Index of Consumer Prices (HICP) is used so results are comparable across countries.

What the CPI aims to measure

The goal is to estimate how household purchasing power for consumption changes: How much money do you need today to buy the same basket as a year ago? Prices are collected in a standardised way and combined using a published weighting scheme.

How the basket is built

The composition is based on household surveys and spending statistics. Big groups usually include housing and energy, transport, food, health, recreation, and services. Within each group, representative items stand for whole categories (for instance one bread type for bakery products). Every item gets a weight that matches its share in total spending.

Why the basket changes regularly

Consumption changes over time: products disappear, new ones appear, and budget shares shift. So statistics offices revise the basket at set intervals (including new base years). They:

• add or remove items as they gain or lose relevance
• adjust weights to match current spending patterns These changes can noticeably move the measured inflation rate even if nothing dramatic changed in the supermarket. What changes is the perspective.

Criticisms and different viewpoints

Substitution effect. When one product becomes much more expensive, households often switch to cheaper alternatives. In the next revision, the weight of the expensive product falls. Price drivers then matter less in the formula, which can decrease official inflation.

Hedonic quality adjustments. If product quality improves, part of a price rise is treated as a quality gain and removed. Supporters call this good methodology. Critics say it leaves room to underestimate real out-of-pocket costs.

Housing and asset prices. The CPI focuses on consumption. Assets such as property or shares are not directly included. People who face rising house prices, rents, or asset valuations often know inflation is higher than the index shows.

Real vs. measured inflation. Households weight items differently from the statistics office. Those who spend a large share on essentials feel price rises more strongly. Frequent purchases (food, energy) shape perceptions more than rare purchases.

Governance and incentives. Because the CPI affects wages, pensions, and contracts, some suspect political or institutional incentives to keep the headline number low.

The Austrian School perspective

From the Austrian view, inflation is mainly money supply expansion, not just a rise in a consumption basket. When money grows, the effect often shows first in asset prices. Consumer prices react later and unevenly. The CPI captures this monetary aspect only indirectly and too narrowly. Bitcoiners add that a consumption-only index understates the slow loss of purchasing power of savings, while a scarce, non-expandable money standard (like Bitcoin) limits this mechanism structurally. Both see the CPI as incomplete and argue for additional indicators (e.g., money aggregates, asset-price indices).

Possible improvements

• More transparent communication on basket revisions and how they affect the inflation rate
• Complementary indices for different household profiles (essentials, seniors, low-income baskets)
• Stronger parallel tracking of asset prices and money supply to see the full picture of currency debasement

Final Thoughts

• The CPI measures price changes for a representative consumption basket
• Main criticisms concern substitution, hedonic adjustments, and the lack of asset-price coverage hence real inflation often differs from measured inflation.
• Inflation is, at root, monetary. The CPI is too narrow and should be complemented by money-supply and asset-price indicators.