Inflation, CPI, and Purchasing Power: A Practical Guide
The Consumer Price Index for All Urban Consumers (CPI-U) measures price changes for a market basket of 80,000+ goods and services across 200+ categories — housing, food, transportation, medical care, education, recreation. BLS data collectors price items in 75 urban areas monthly. The index is anchored to 1982-1984 = 100, meaning that period is the baseline.
1. How CPI Works
The Consumer Price Index for All Urban Consumers (CPI-U) measures price changes for a market basket of 80,000+ goods and services across 200+ categories — housing, food, transportation, medical care, education, recreation. BLS data collectors price items in 75 urban areas monthly. The index is anchored to 1982-1984 = 100, meaning that period is the baseline.
2. Historic US Inflation Rates
3. Real vs Nominal Wages
Median US nominal wage grew from $3,000/year in 1965 to $60,000+ in 2023 — a 20× increase. But real (inflation-adjusted) wages grew only modestly. Real wage stagnation is the central economic complaint of the 21st century and explains much of today's political focus on cost of living.
4. Hedging Strategies
- TIPS (Treasury Inflation-Protected Securities): principal adjusts with CPI
- I-Bonds: 0% real + CPI adjustment, capped at 10% nominal
- Equities: long-term real returns ~7% — historically beat inflation
- Real estate: leveraged exposure to rental income and appreciation
- Commodities (gold, oil): direct inflation play but volatile
Conclusion
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