The U.S. government tracks inflation in many ways, and one popular way is the Consumer Price Index (CPI). This index is then used to adjust everything from income tax brackets to Roth IRA contributions limits to pension payouts to the return on inflation-linked bonds (TIPS). There are then sub-indices for different groups and regions.
Each month, the Bureau of Labor Statistics gathers 84,000 prices in about 200 categories — like gasoline, bananas, dresses and garbage collection — to form the Consumer Price Index, one measure of inflation. [...] The categories are weighted according to an estimate of what the average American spends, as shown below.
The NY Times put together a nice interactive infographic that helps explain the ingredients of the CPI and their relative importance:
You can hover your mouse, and zoom in/out as you like. Does it match your personal spending and inflation rates? Probably not, so it’s good to note the differences. For instance, actual housing prices are not included in the CPI, but instead “owner’s equivalent rent” (24% of CPI) is tracked which is defined as what homeowner’s would pay to rent their home. And once I get my mortgage paid off, I’ll be more worried about other things like health insurance (only 6% of CPI).
Link via the Betterment Blog (Betterment review upcoming).