The CPI is a statistical calculation that serves as a method to measure how prices of consumer goods change over time. Naturally, the prices are set by several market factors, but when economists conduct surveys and compile the data that makes up the CPI, a certain picture begins to emerge as to how inflation may be affecting the pockets of consumers.
In the United States, the Bureau of Labor Statistics is the federal entity tasked with producing and reporting the CPI survey. To a certain extent, the U.S. CPI survey measures more than just inflation; it provides a somewhat comprehensive index to compare the cost of living index over time. The CPI survey is a massive statistical undertaking; its market basket of goods includes 200 categories and thousands of items along with variations.
To reach a sample size that is scientifically sound for the CPI, data collectors either call or visit thousands of retail stores across several metropolitan areas. There are various CPI versions; the most widely used are the nationwide and regional measurements. The establishments are surveyed in complete confidentiality, and several economic variables are applied. The goods surveyed range from automobiles to meals at Chinese restaurants, and the price data includes sales taxes where applicable.
It is important to note that there are some bias factors that often cause the inflation figures to be overstated; these factors include: substitutions made by consumers due to quality, novelty or affordability issues, and consumer trends such as shifting to warehouse stores or outlets. There are also seasonally adjusted CPI reports that take into account cyclical economic factors such as the holiday shopping season.
How Retail Store Owners Can Use the CPI
There are three major uses of the CPI at the retail store level: to get market intelligence, to calculate the value of real money, and to set prices applying a retail markup or markdown methodology.
1 – Market Intelligence
Although various economists disagree on whether the CPI can be taken at face value insofar as estimating inflation, investors often turn to this measurement for the purpose of getting information related to the strength of the economy and its potential for growth. For retail store owners, the CPI offers more than just inflation data; it also reports on consumer behavior, which does not always conform to inflation. To this effect, a butcher shop that sells both filet mignon and T-bone steak should be alert to a CPI calculation of one percent for the former and of nine percent of the latter; this could reflect a shift in consumer preference for T-bone steak and disinterest for filet mignon.
2 – Real Value of Money
Retail store owners need to be realistic about the economic situations of their customers, and one way to do this is by estimating the real value of money. The prices of goods sitting on store shelves do not always represent their true value. For example, $100 worth of filet mignon in the year 2000 is not the same as 2015. Using the online CPI calculator provided by the Bureau of Labor Statistics, it is easy to see that the changes in consumer goods prices since the early 21st century have diminished the purchasing power of $100 over the years. In 2015, shoppers would have to pay $138 for the same amount of filet mignon they used to purchase in the year 2000.
3 – Setting Retail Prices
It is generally easy for retailers to figure out sales prices once they have committed to a markdown or markup rate that reflects their profit or loss objectives. With CPI data, business owners can check whether their goals are realistic. If the markup exceeds the inflation rate, shoppers may feel that prices are too high; if the inflation rate for an item has been low for more than a quarter, a retailer may wish to sell at markdown in order to move items taking up space on the shelves and in the stockroom.
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