# Basket of Goods: Definition, CPI Calculation, and Example

![Basket of Goods: Commonly purchased consumer products and services whose prices are monitored to calculate inflation.](https://www.investopedia.com/thmb/UQKGR0R_FOf-5xHgkGR5yozK_c4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/basket_of_goods.asp-FINAL-1-e377b62b01334ddf849d5ee168defe19.png)

*— Investopedia / Joules Garcia*

> **Definition**
>
> A basket of goods is a collection of consumer items and services used to measure inflation by tracking price changes over time.

## What Is a Basket of Goods?

A basket of goods is a collection of items that represent consumer spending patterns. It is made up of a fixed set of goods and services whose prices are used to measure inflation. These prices are monitored each month by federal governments so they can set and make changes to their [inflation targets](https://www.investopedia.com/terms/i/inflation_targeting.asp). For example, the [consumer price index (CPI)](https://www.investopedia.com/terms/c/consumerpriceindex.asp), a common measure of inflation, measures the price change over time for a basket of goods and services. The Bureau of Labor Statistics (BLS) tracks this basket of goods in the United States.  

### Key Takeaways

*   A basket of goods represents consumer spending and is used to track changes in the prices of consumer goods and services over time.
*   The Bureau of Labor Statistics tracks 80,000 prices monthly to assess inflation for more than 200 categories of products and services.
*   The prices of goods and services are gathered mostly from visits by BLS data collectors to some 23,000 retail and service outlets in 75 urban areas. Data on rents are collected from about 50,000 landlords or tenants.
*   CPI calculations factor in consumer substitution of items rising in price with alternatives and filter out price increases reflecting product improvements.  
    

## Understanding a Basket of Goods

The concept of a basket of goods is central to understanding economic [trends](https://www.investopedia.com/terms/t/trend.asp) and measuring [inflation](https://www.investopedia.com/terms/i/inflation.asp). By tracking a representative sample of items, economists can gauge changes in the cost of living and consumer prices over time.

The composition of this basket can vary by country and can be influenced by numerous factors, including technological advancements, government policies, and shifts in consumer behavior. This [basket](https://www.investopedia.com/terms/b/basket.asp) can also change over time; we'll look at this more closely in the article.

The basket of goods can also highlight the interconnection between various [economic sectors](https://www.investopedia.com/terms/s/sector.asp). For example, changes in transportation costs can affect food prices due to shipping expenses, while fluctuations in utility costs can influence housing affordability.

Policymakers rely on these types of relationships to better understand the implications of the policies they consider implementing.

## Basket of Goods Deconstructed

With 80,000 prices sampled monthly for more than 200 categories of products and services, the [Bureau of Labor Statistics](https://www.investopedia.com/terms/b/bls.asp) is using a huge basket, because its goal is to get an accurate measure of price changes for consumer goods and services across the U.S. economy.

Broad [consumer spending](https://www.investopedia.com/terms/c/consumer-spending.asp) categories like food, energy, apparel, and services include subcategories tracking inflation for everything from apples and premium unleaded gasoline to men's underwear and funerals.

The prices of goods and services are gathered mostly from visits by BLS data collectors to some 23,000 retail and service outlets in 75 urban areas. Data on rents are collected from about 50,000 landlords or tenants.

Items for sampling at each outlet are selected randomly based on odds proportional to how much spending they attract relative to category alternatives in terms of brand, variety, and size or weight. Items remain in the sample for four years.

## How the Government Calculates CPI

After the prices are collected, BLS product specialists make adjustments to ensure the price changes are measuring inflation rather than the cost of product improvements in items such as autos, consumer appliances, and electronics.

The prices are used to calculate basic indexes for 211 goods, services, and housing item categories for 32 geographic areas subdividing all U.S. urban areas. The BLS then calculates more than 7,776 item-area combination basic indexes in a way that factors in the substitution of cheaper items for more expensive ones within and between spending categories.

All those item-area indexes are then weighed based on recent two-year results from a detailed [consumer spending](https://www.investopedia.com/terms/c/consumer-spending.asp) survey to calculate two versions of the consumer price index:

*   The [CPI for All Urban Consumers (CPI-U)](https://www.investopedia.com/terms/c/cpiu.asp) reflects the spending patterns of over 90% of the U.S. population living in areas where the BLS collects price data. It is the basis of the headlines about the rate of change in consumer prices, or the inflation rate.
*   The [CPI for Urban Wage Earners and Clerical Workers (CPI-W)](https://www.investopedia.com/terms/c/cpi-w.asp) covers approximately 30% of the population and is limited to households with income derived predominantly from clerical or wage-paying occupations.

The CPI-W is used to adjust [Social Security](https://www.investopedia.com/terms/s/socialsecurity.asp) payments and federal income tax brackets for inflation.

## How Does CPI Relate to Inflation?

Although the terms CPI and inflation are often used interchangeably, the CPI only measures inflation as experienced by consumers. Other data measures alternative manifestations of inflation.

The [producer price index (PPI)](https://www.investopedia.com/terms/p/ppi.asp) measures the change in the prices paid by producers, while the employment cost index assesses inflation in the [labor market](https://www.investopedia.com/terms/l/labor-market.asp). The BLS also tracks changes in import and export prices, while the gross domestic product price deflator is a measure of inflation across the U.S. economy, including exports but not imports.

## Alternative Basket of Goods Item Collection Methods

In addition to the major basket of goods items, the BLS has specific collection methods for certain goods. These specific basket of good collection methods include:

*   **Airline Fares:** Information from the U.S. Department of [Transportation](https://www.investopedia.com/terms/t/transportation_sector.asp) database is used for the airline fares index.
*   **Apparel and Household Goods:** One firm provides BLS with a large volume of price data instead of in-store data collection.
*   **Postage:** The USPS Household Diary Survey determines the delivery of household mail by type and postal zone. Monthly prices are collected from the USPS public website.
*   **Prescription Drugs:** One firm provides BLS with extensive price data, replacing in-store data collection.
*   **Used Cars and Trucks:** Sample and prices come from the J.D. Power Information Network. A sample is also taken of 480 vehicles chosen from two- to eight-year-old vehicles and updated annually.
*   **Gasoline:** Since June 2021, BLS has used a secondary dataset for gasoline prices. Monthly indexes and average prices per gallon are published using the new data source.
*   **New Vehicles:** Since April 2022, BLS has used transaction data from J.D. Power for the new vehicles index. The index includes prices for cars and trucks, excluding motorcycles.

## CPI Index Readings

Because inflation imposes economic costs in terms of added uncertainty, policymakers aim to keep it under control. They often use changes in the representative basket of goods and services as measured by the CPI as one of the benchmarks in setting monetary policy.

The Federal Reserve aims for a 2% annual inflation rate in the U.S., which it has determined is most compatible with its mandate to promote stable prices and maximum employment.

## Changes in the Basket of Goods Composition

Beginning with January 2023 data, the BLS adjusted the weighting method for [owners' equivalent rent (OER)](https://www.investopedia.com/terms/o/owners-equivalent-rent.asp). This adjustment incorporated neighborhood-level information on housing structure types to weight OER unit sample observations. In short, this change aimed to provide a more accurate reflection of housing costs within neighborhoods.

Also, starting with January 2023 data, the BLS updated CPI weights annually based on a single calendar year of consumer expenditure data from 2021. This moved away from the previous biennial updates using two years of data. Last, from April 2022, the CPI program replaced the data for the new vehicles index with transaction data from J.D. Power.

The BLS often acts transparently to inform the general public of these changes. Detailed research and methodology behind these changes were outlined in the working paper “A New Vehicles Transaction Price Index: Offsetting the Effects of Price Discrimination and Product Cycle Bias with a Year-Over-Year Index.”

## What Is a Basket of Goods in Economics?

A basket of goods in economics is a representative collection of items used to measure changes in the cost of living and inflation over time. It includes various goods and services that are commonly consumed by households, such as food, housing, transportation, and healthcare.

## Why Is the Basket of Goods Important?

The basket of goods is important because it provides a measure of inflation and the cost of living. By tracking changes in the prices of items in the basket, economists can gauge how much more or less consumers are paying for goods and services over time.

## What Items Are Typically Included in a Basket of Goods?

Common items include food products like bread and milk, housing costs such as rent and utilities, transportation expenses like gasoline, healthcare services, and personal care items.

## How Often Is the Basket of Goods Updated?

Updates can occur annually or biennially, depending on the economic agency’s practices. This process involves reviewing and adjusting the items included in the basket based on changes in consumer behavior, new products, and shifts in spending habits. The government agency dictating the basket of goods often publishes research on the change.

## The Bottom Line

A basket of goods is a collection of items used to measure changes in the cost of living and inflation by tracking the prices of commonly consumed goods and services over time. It reflects consumer spending patterns and is used to calculate economic indicators like the CPI.

> **Article Sources**
>
> 1.  U.S. Bureau of Labor Statistics. "[Consumer Price Index Frequently Asked Questions](https://www.bls.gov/cpi/questions-and-answers.htm)." Click "How and When Are CPI Prices Collected and Reviewed?"
>     
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>     
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>     
> 4.  U.S. Bureau of Labor Statistics. "[Consumer Price Indexes Overview](https://www.bls.gov/cpi/overview.htm)."
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> 5.  U.S. Bureau of Labor Statistics. "[Consumer Price Index Frequently Asked Questions](https://www.bls.gov/cpi/questions-and-answers.htm)."
>     
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>     
> 7.  U.S. Bureau of Labor Statistics. "[CPI-Urban Wage Earners and Clerical Workers (Current Series)](https://www.bls.gov/help/one_screen/cw.htm)."
>     
> 8.  Social Security Administration. "[CPI For Urban Wage Earners And Clerical Workers](https://www.ssa.gov/oact/STATS/cpiw.html)."
>     
> 9.  U.S. Bureau of Labor Statistics. "[Overview of BLS Statistics on Inflation and Prices](https://www.bls.gov/bls/inflation.htm)."
>     
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>      
> 11.  Federal Reserve System. "[Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run?](https://www.federalreserve.gov/faqs/economy_14400.htm)"
>      
> 12.  U.S. Bureau of Labor Statistics. "[Recent and Upcoming Methodology Changes: 2022](https://www.bls.gov/cpi/notices/2022/methodology-changes-2022.htm)."
>      
> 13.  U.S. Bureau of Labor Statistics. "[A New Vehicles Transaction Price Index: Offsetting the Effects of Price Discrimination and Product Cycle Bias With a Year-Over-Year Index](https://www.bls.gov/osmr/research-papers/2019/pdf/ec190040.pdf)."