The Economic Recovery Tax Act (ERTA) of 1981 

was passed, in part, to prevent bracket creep 

from adversely affecting American taxpayers.

Because of ERTA, and modifications made to 

that act in 1986, federal income tax brackets, 

as well as personal exemptions and standard 

deductions, are now tied to changes in the 

average CPI for All Urban Consumers (CPI-U) 

for the U.S. City Average for All items for the 

12-month period ending in August of each 

year.

How the CPI-U affects federal

income tax brackets

To see how the all items CPI-U affects federal 

income tax brackets, first take a look at the 

federal income tax brackets for 2008 for a 

married couple filing jointly. (See table 1.)

To determine the 2009 federal income tax 

brackets, the Internal Revenue Service (IRS) 

More than 140 million individual federal tax 

returns are filed each year.1 Federal income 

tax brackets, as well as personal exemption 

amounts, standard deduction amounts, and 

other tax parameters, are adjusted each year 

by changes in the consumer price index (CPI).

Before 1985, federal income tax brackets were 

not indexed to changes in the cost of living. 

As such, inflation eroded a family’s purchasing 

power in multiple ways. First, families whose 

income did not keep up with inflation saw 

their real incomes fall. Second, even families 

whose pre-tax income kept pace with inflation 

were subject to reductions in real disposable 

income, as nominal increases in income forced 

taxpayers into higher tax brackets. For example, suppose a family’s cost of living rose 5 percent in a year, as did its income. At first glance, 

the real income of this family has not changed, 

as its income has kept up with inflation. However, before 1985, the increase in the nominal 

income of this family would have resulted in 

higher federal income taxes, as more of the 

family’s income would have been subject to 

the highest applicable tax bracket. This type of 

subtle tax increase is known as bracket creep. 

Current Price Topics

The Use of the CPI in

Adjusting Federal Income

Tax Brackets and other

Federal Tax Parameters

1

Consumer Price Index: Second Quarter 2010

U.S. Bureau of Labor Statistics August 2010 Volume 1, Number 6

Table 1: Federal income tax brackets,

married filing jointly, 2008 tax year

Marginal tax rate

(in percent) Tax brackets

10 Under $16,050

15 $16,051–$65,100

25 $65,101–$131,450

28 $131,451–$200,300

33 $200,301–$357,700

35 Over $357,700
2

looked at the average CPI-U from September 

2007 through August 2008, and compared 

that average with the one for the preceding 12 months. For the 12 months ending in 

August 2007, the average CPI-U was 204.873. 

For the 12 months ending August 2008, the 

average CPI-U was 213.605, an increase of 4.26 

percent. Therefore, each of the individual federal income tax brackets for 2009 was adjusted upwards by approximately 4.26 percent.2

(See table 2.)

CPI data were used in the same way to estimate 

the federal income tax brackets for 2010. The 

CPI-U for the 12 months ending in August 2009 

was 214.002, which was only 0.19 percent higher than the previous annual average of 213.605. 

This resulted in only very slight increases in 

these tax brackets for 2010. (See table 3.)

Again, tying changes in the tax brackets to 

the CPI has the effect of preventing taxpayers from being moved into higher marginal 

tax brackets for increases in income that do 

not exceed inflation. Similarly, this legislation 

has the effect of reducing taxes over time for 

families on a fixed income. For example, if a 

family made a constant $67,000 in 2008, 2009, 

and 2010, their real income has fallen because 

their income has not kept pace with inflation. Since tax brackets are tied to the CPI, the 

federal tax burden for this family actually fell 

from 2008 to 2010, and its marginal tax rates 

dropped from 25 percent in 2008 to 15 percent in 2010.

How the CPI-U affects standard deduction 

amounts and personal exemption amounts

Taxpayers who do not itemize can instead 

use a “standard deduction” amount to reduce 

the amount of income subject to federal tax. 

Similarly, “personal exemption” amounts can be 

deducted for each eligible member of the taxpayer’s family. Similarly to the federal tax brackets, these federal tax parameters are also tied to 

annual changes in the CPI-U for each 12-month 

period ending in August. (See table 4.)

Table 2: Federal income tax brackets,

married filing jointly, 2009 tax year

Marginal tax rate

(in percent) Tax brackets

10 Under $16,700

15 $16,701–$67,900

25 $67,901–$137,050

28 $137,051–$208,850

33 $208,851– $372,950

35 Over $372,950 

Table 3: Federal income tax brackets,

married filing jointly, 2010 tax year

Marginal tax rate

(in percent) Tax brackets

10 Under $16,750

15 $16,751–$68,000

25 $68,001–$137,300

28 $137,301–$209,250

33 $209,251–$373,650

35 Over $373,650 

 C U R R E N T P R I C E T O P I C S
3

Note that, as with the tax brackets, the increase 

in standard deduction and personal exemption 

amounts rose more than 4 percent from 2008 

to 2009. However, since the annual average 

CPI-U rose less than 0.2 percent for the next 

12-month period, the standard deduction and 

personal exemption amounts (after rounding 

down to the next $50 amount), remained unchanged from 2009 to 2010. 

All items

The all items Consumer Price Index for All 

Urban Consumers (CPI-U) declined at a 

1.5-percent seasonally adjusted annual rate 

(SAAR) during the second quarter of 2010.3

For the first 6 months of 2010, the index 

has declined at a 0.3-percent SAAR. This 

compares with an increase of 2.7 percent in 

2009. (See chart 1.)

A downturn in the energy index is the main 

cause of the decline in the all items index 

thus far in 2010, but a deceleration in the 

index for all items less food and energy in 

the first quarter of the year is notable as 

well. The energy index rose significantly in 

2009 but has declined so far in 2010. The 

index for all items less food and energy has 

risen so far in 2010, but at a rate lower than 

recent historical norms. In contrast, the 

food index has risen modestly in 2010 after 

declining in 2009.

Energy

Energy, typically, has been the most volatile 

of the major CPI components. It declined at 

a 25.7-percent SAAR in the second quarter 

of 2010 after rising at a 9.2-percent rate in 

the first quarter. (The monthly index has 

actually been declining since January.) For 

the first 6 months of 2010, the energy index 

has declined at a 9.9-percent SAAR after 

increasing 18.2 percent in 2009.

Within the energy component, the gasoline

index fell at a 38.9-percent SAAR in the second 

quarter of 2010. This decline followed an increase at an 8.6-percent rate in the first quarter 

and a 53.5-percent rise over all of 2009. Sharp 

changes in gasoline prices are often a major 

factor in short-term CPI movements. Over the 

past few years, crude oil prices—and subsequently retail gasoline prices—have been 

quite volatile. From July 2007 to July 2008, 

gasoline prices rose sharply, increasing 37.9 

percent; crude oil prices peaked in July 2008 

at more than $134 a barrel. During the last 5 

months of 2008, as crude oil prices collapsed 

Table 4: Standard deduction and personal 

exemption amounts

Tax year

Standard

deduction

amount

Personal

exemption

amount

2008 $10,900 $3,500

2009 $11,400 $3,650

2010 $11,400 $3,650

 C U R R E N T P R I C E T O P I C S

Current Price Trends

Decline in Energy Prices 

Dominates Second Quarter 

Retail Inflation Picture
at a 3.4-percent annual rate after falling 18.1 

percent in 2009, while the electricity index 

has fallen at a 2.7-percent rate after falling 0.5 

percent in 2009. The fuel oil index fell at an 

8.9–percent rate in the second quarter after 

rising at an 18.2-percent rate in the first.

Food

Food prices rose at a 0.6-percent SAAR in 

the second quarter of 2010 after rising at a 

2.3-percent rate in the first quarter. The food 

index had declined 0.5 percent in 2009. Grocery store food prices, which rose at a 3.7-percent rate in the first quarter, were flat in the 

second quarter.5

 Of the six major grocery store 

food groups, only the meats, poultry, fish, 

and eggs group increased in second quarter. 

It rose at a 12.0-percent rate after rising at a 

4.1-percent rate in the first quarter. Within this 

group, the beef and veal index (22.2 percent 

to under $32 a barrel, retail gasoline prices fell 

by more than 50 percent. In 2009, pump prices 

turned sharply higher again, increasing more 

than 50 percent, with crude oil prices increasing to around $70 by the end of 2009.4

The household energy index also turned down 

in the second quarter of 2010, falling at a 

10.1-percent rate after rising at an 8.9-percent 

rate in the first quarter. All the major components of household energy declined in the second quarter after rising in the first. The sharpest downturn was in the natural gas index, 

which declined at a 17.7-percent SAAR in the 

second quarter after rising at a 29.8-percent 

annual rate in the first quarter. The electricity

index turned down as well, falling at a 7.1-percent SAAR in the second quarter of 2010 after 

rising at a 2.0-percent rate in the first quarter. 

For 2010 so far, the natural gas index has risen 

4

2.7

-0.5

18.2

1.8 0.9 2.3

9.2

-0.2 -1.5

0.6

-25.7

1.3

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Percent change

2009 change, not seasonally adjusted

2010 1st quarter change, seasonally adjusted annual rate

2010 2nd quarter change, seasonally adjusted annual rate

All items Food Energy All items less food 

and energy

Chart 1. CPI-U percent changes for all items, food, energy, and all items less food 

 C U R R E N T P R I C E T R E N D S
SAAR) and the pork index (16.6 percent SAAR) 

increased most rapidly. The other food at 

home groups posted declines, with fruits and 

vegetables falling the sharpest, at a 9.9-percent rate. The indexes for fresh fruits (at −16.9 

percent SAAR) and fresh vegetables (at −9.0 

percent SAAR) both declined sharply in the 

second quarter. Part of the decrease in the 

fresh vegetables index can be attributed to 

tomato prices, which dropped sharply in the 

second quarter after rising sharply in the first.

The other grocery store food groups decreased 

more modestly in the second quarter. Cereals 

and bakery products fell at the same 2.8-percent SAAR in the second quarter as it did in the 

first. Dairy and related products fell at a 1.7-percent rate after rising in each of the previous two 

quarters. The Nonalcoholic beverages index 

declined at a 2.6-percent rate, its fifth consecutive quarterly decline. Other food at home fell at 

a 0.5-percent SAAR in the second quarter.

Food away from home rose at 1.4-percent rate 

in the second quarter after rising at a 0.4-percent rate in the first. It has risen just 1.2 percent 

over the past year after rising at an average 

3.6-percent rate over the previous 5 years.

Grocery store prices have risen in 2010 after 

falling through much of 2009, but the current rate of increase is still below the recent 

historical average. From November 2002 to 

November 2007, grocery store food prices rose 

at a 3.1-percent average annual rate. They then 

accelerated, increasing 7.0 percent from November 2007 to November 2008. In the next 12 

months, however, the index turned down, falling 2.9 percent, the sharpest annual drop since 

June 1959. Since then, the food at home index 

has risen at a 2.0-percent rate (seasonally adjusted). Currently none of the six major grocery 

store food groups have increased or decreased 

more than 2.0 percent over the last 12 months.

All items less food and energy

The index for all items less food and energy

rose at a 1.3-percent rate in the second quarter of 2010 after falling at a 0.2-percent annual 

rate in the first quarter. Much of the reversal 

can be attributed to the shelter index, which 

rose at a 0.9-percent rate in the second quarter after falling at a 2.2-percent rate in the first. 

Within shelter, rent rose at a 0.4-percent SAAR 

in the second quarter and owners’ equivalent 

rent rose at a 0.3-percent rate. Lodging away 

from home rose at a 23.1-percent rate after 

falling in the first quarter.

Several other indexes turned up in the second 

quarter as well. The sharpest upturn was the 

airline fare index, which rose at a 14.3-percent 

rate in the second quarter after declining at a 

10.9-percent rate in the first. Similarly, the new 

vehicles index turned up in the second quarter, 

rising at a 0.4-percent rate after declining at a 

1.2-percent rate in the first. Apparel, down at 

a 4.5-percent rate in the first quarter, rose at a 

1.3-percent rate in the second, and Recreation

rose at a 1.4-percent rate in the second quarter 

after falling at a 1.0-percent rate in the first.

Household furnishings and operations continued to decline in the second quarter of 

5

 C U R R E N T P R I C E T R E N D S
2010, falling at the same 3.7-percent rate 

as it did in the first quarter, and the index 

for communication turned down, falling at 

a 1.3-percent rate after rising slightly in the 

first quarter. Used cars and trucks, which rose 

at an 11.4-percent SAAR in the first quarter, 

continued to advance in the second quarter 

but decelerated, rising at a 6.6-percent rate. 

The medical care index also decelerated in 

the second quarter, rising at a 2.3-percent 

rate after increasing at a 5.7-percent rate in 

the first. In contrast, the tobacco index accelerated in the second quarter, rising at a 

9.9-percent rate after increasing at 1.8-percent rate in the first.

The rate of inflation for all items less food and 

energy has slowed recently. For the 5-year period from August 2003 to August 2008, the index 

for all items less food and energy increased at 

a 2.3-percent annual rate. (A very similar result 

holds if the period is extended back 10 or 15 

years.) Since August 2008, however, the average annualized increase has fallen by nearly 

half, to 1.2 percent. (See chart 2.)

Much of this slower rate of inflation for the all 

items less food and energy index is attributable to the slowdown in the index for shelter, 

which is heavily weighted in the CPI. After 

increasing at a 3.0-percent average rate for 

the August 2003–08 period, the shelter index 

has risen at only a 0.2-percent annual rate 

since. Other indexes have decelerated as well, 

however, including airline fares and household furnishings and operations, which both 

turned down, as well as recreation, education, 

and medical care.

In contrast, some indexes within all items less 

food and energy actually accelerated recently. 

These include the tobacco index, which has 

6

 C U R R E N T P R I C E T R E N D S

-3

-2

-1

0

1

2

3

4

5

6

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

2008 2009 2010

Percent change

All items All items less food and energy

Chart 2. Twelve-month percent change, all items and all items less food and 

energy, January 2008–June 2010

SOURCE: U.S. Bureau of Labor Statistics
risen sharply of late, in part due to excise 

tax increases, and the indexes for new 

vehicles and for used cars, which have both 

turned up after declining in the earlier period. Table 5 compares the changes of selected categories within all items less food 

and energy for the August 2003–August 

2008 and August 2008–June 2010 periods.

Price movements described in this text 

reflect data as released on July 16, 2010. All 

12-month and longer percent changes reflect not seasonally adjusted data except as 

noted. Percent changes covering less than 

a year are based on seasonally adjusted 

annual rates, unless otherwise noted. CPI 

seasonally adjusted indexes and percent 

changes are subject to annual revision. 

Further information is available from the CPI

Information and Analysis section, at 

cpi_info@bls.gov or (202) 691-7000.

Table 5: Annualized percent change for selected CPI categories and time periods

Category

August 2003–

August 2008 

(1)

August 2008–June 

2010 (seasonally 

adjusted) (2)

Difference 

col. 2− col. 1

Airline fares 5.3 -4.1 -9.4

Household furnishings and operations 2.0 -1.3 -3.3

Shelter 3.0 0.2 -2.8

Recreation 1.1 0.0 -1.1

All items less food and energy 2.3 1.2 -1.1

Education 6.1 5.1 -1.0

Medical care 4.1 3.5 -0.6

Apparel -0.2 -0.1 0.1

Communication -1.0 -0.3 0.7

New vehicles -0.5 1.3 1.8

Used cars and trucks -1.4 4.1 5.5

Tobacco 4.8 17.8 13.0

7

 C U R R E N T P R I C E T R E N D S
Notes

1

 See http://www.irs.gov/pub/irs-soi/10winbulindincretpre.pdf (visited July 28, 2010).

2

 More precisely, each annual average is compared to an earlier initial base period, and the resulting numbers are rounded down to 

the next $50.

3

 Data in text, charts and tables are the latest available at the time of publication. Internet links may lead to more recent data.

4

 Energy Information Administration; see http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm (visited July 28, 2010).

5 The six major grocery store food groups are: Cereals and bakery products; Meats, poultry, fish and eggs; Dairy and related products; 

Fruits and vegetables; Nonalcoholic beverages and beverage materials; and Other food at home.

8

 C U R R E N T P R I C E T R E N D S