How inflation is measured: consumer price indexes explained

“Inflation was 3% last year” is one of the most quoted numbers in economics, and one of the least understood. Behind it sits a consumer price index: a carefully weighted average of thousands of price changes, built to rules that differ from country to country. This guide explains how statistics offices build those indexes, why the UK has both a CPI and a CPIH, why the euro area uses a harmonised index, and why your own experience of rising prices may not match the headline.

What a consumer price index measures

A consumer price index (CPI) tracks the cost of buying a fixed collection of goods and services over time. The US Bureau of Labor Statistics describes its CPI as a measure of the average change over time in the prices paid by urban consumers for a representative basket of consumer goods and services. Eurostat describes inflation, as measured by its harmonised index, as the change over time in the prices paid by households for consumer goods and services.

Two words in those definitions do a lot of work. Average means the index describes a typical household, not any particular one. Consumer means the index covers what households buy for consumption. The BLS, for example, excludes investment items such as stocks, bonds and real estate, as well as business expenses. The headline inflation rate is then simply the percentage change in that index, most often over 12 months.

The basket and its weights

Statistics offices cannot price everything, so they choose representative items, grouped into categories such as food, housing, transport, clothing and recreation. Each category gets a weight: its share of total household spending. A 10% rise in the price of something that takes 1% of spending moves the index far less than a 10% rise in something that takes 20%.

Weights come from household spending data and are refreshed regularly:

• United States: since January 2023 the BLS has updated CPI weights every year using a single year of consumer spending data, from two years earlier.
• United Kingdom: the ONS derives weights from household final consumption expenditure and updates them annually, and reviews the basket of items every year.
• Canada: Statistics Canada updates basket weights annually; the 2025 update used 2024 expenditure.
• Australia: the ABS has updated weights annually since 2018.
• Germany: Destatis weights roughly 600 product types using a household income and expenditure survey of around 60,000 households, and updates the weighting pattern at five-year intervals.

The worked example below shows how weights turn individual price changes into one number.

Collecting prices

Prices are gathered every month through a mix of methods. The ONS describes local collection in shops across the UK, central pricing for chains with national pricing policies, and central collection for items whose prices are set nationally, and has more recently added scanner data from grocery retailers that captures actual transactions. Destatis collects more than 300,000 individual prices a month, including from the internet and catalogues. The BLS prices goods and services each month and runs a separate survey of rental housing units for its shelter measures.

Collectors usually price the same item in the same outlet each time, so that a change in the recorded price reflects a change in price rather than a change in what is being priced.

Index numbers and reference periods

A price index is expressed relative to a reference period set to 100. The US CPI-U uses 1982–84 = 100, and the UK’s CPI and CPIH use 2015 = 100. The level of an index on its own means little; what matters is the ratio between two dates.

This index-ratio method is exactly what the inflation calculator uses, applied to each publisher’s own series. To project the effect of a constant inflation rate on savings, the compound interest calculator can show a real (inflation-adjusted) value alongside the nominal balance.

Chain-linking

Because weights change, modern indexes are chain-linked: each year’s index is calculated with that year’s weights and then joined to the previous year’s. The ONS calculates a series each year that takes the value 100 in the most recent January and links it to the long-run series; Eurostat describes the HICP as a chain-linked Laspeyres-type index linked through December. For example, if an index reaches 103 at the link month and the newly weighted index then rises 2%, the published long-run index reads 103 × 1.02 = 105.06.

Quality change and substitution

A new phone may cost more than last year’s model but also do more. If the index recorded the whole price difference as inflation, it would overstate price rises. Statistics offices therefore adjust for quality change. The BLS says its commodity specialists aim to stop changes in the quality of items from affecting measured price change, and uses hedonic regression for some items: a statistical model that values an item’s characteristics separately so a change in features can be priced. The ONS uses hedonic methods for items including laptops, tablets and smartphones.

Consumers also switch between products when relative prices change. A fixed-weight index does not capture this within a year, which can overstate the rise in the cost of living. The BLS publishes a separate Chained CPI for All Urban Consumers (C-CPI-U) that uses a different formula to reflect substitution between item categories. Since 2017 it has been used to adjust US federal tax brackets for inflation.

Housing: the biggest difference between indexes

Owner-occupied housing is the single largest source of differences between national indexes, because buying a home is part consumption and part investment. Countries handle it in different ways:

• US CPI: treats owned homes as capital goods and measures the shelter they provide through owners’ equivalent rent, based on what homes would rent for.
• UK CPIH: adds owner occupiers’ housing costs using rental equivalence, plus Council Tax. The UK CPI leaves both out.
• Euro-area HICP: excludes owner-occupied housing.
• Germany’s national CPI (VPI): unlike the HICP, includes household spending on owner-occupied housing, games of chance and broadcasting fees.
• Canada: includes mortgage interest cost among the components of owned accommodation.
• Australia: uses an acquisitions approach that includes the cost of new dwelling construction for owner-occupiers, rather than mortgage interest.

CPI, CPIH, HICP and CPI-U compared

Australia is a recent change. From the release on 26 November 2025, covering October 2025, the ABS moved its primary measure of headline inflation from the quarterly CPI to a complete Monthly CPI. The earlier Monthly CPI Indicator stopped after its October 2025 release, and a quarterly series continues for indexation and contracts, calculated as the average of the three relevant monthly figures. Older data and contracts may still refer to quarterly figures.

The UK also still publishes the Retail Prices Index (RPI) for contractual reasons, but the ONS notes it does not meet the standard for designation as accredited official statistics.

Why your personal inflation rate differs

The BLS puts it plainly: the CPI does not necessarily measure your own experience with price change, because its basket reflects the average household of the population it covers. Several things can push your personal rate above or below the headline:

• Different spending shares. As the basket example showed, a household that spends more on fast-rising categories faces higher inflation from the same price changes.
• Housing situation. Renters, owners with a mortgage and outright owners are affected very differently by rent and interest-rate changes, and indexes treat housing in different ways.
• Where and how you shop. Regional prices, store choice and brand switching all vary from the average.

If you are comparing values across countries as well as across time, the order of operations matters. Adjusting an amount for inflation in its own currency and then converting it with the currency converter at today’s rate can give a different answer from converting first and then applying the other country’s inflation, because exchange rates move for reasons beyond inflation.

Revisions and release frequency

Most headline CPIs are monthly. Revision policies vary: the US CPI-U and CPI-W are final when issued because they are widely used in contracts, pensions and tax brackets; seasonally adjusted US figures can be revised for up to five years; and the C-CPI-U goes through interim revisions before becoming final 10 to 12 months later. Germany issues a preliminary estimate near the end of the reference month and final results around the middle of the following month.

The MoneyOtter inflation calculator stores each publisher’s index values exactly as published, with the series name, publisher, latest observation and licence shown next to every result. How we source, refresh and log revisions to those series is described on the methodology page. For how inflation interacts with interest rates on savings and loans, see our guide to APR, AER and nominal rates.

This guide explains how things work in general terms. It isn’t financial, tax or legal advice. Spotted something out of date? Email errors@moneyotter.com and we’ll check it against the source.