What It Is:
The Consumer Confidence Index (CCI) is an index based on the monthly Consumer Conference Board survey that measures consumer sentiment regarding current and future economic conditions. Note that the CCI is not the same as the Consumer Sentiment Index published by the University of Michigan.

How It Works/Example:
The U.K. company Taylor Nelson Sofres PLC (TNS) conducts a monthly survey of 5,000 U.S. households in conjunction with The Conference Board, which is a non-profit organization for business research.

The survey asks questions in five major categories:

     Appraisals of present business conditions and employment
     Expectations for business conditions and employment in the next six months
     Plans to buy cars, houses, and other big-ticket items in the next six months
     Vacation plans in the next six months
     Expectations of inflation, interest rates, and stock prices in the next 12 months.

The participants provide objective answers such as "better," "worse," and "same," although some questions have "yes" or "no" answers.

The index is calculated by determining the percentage of positive responses as a percentage of all responses and comparing those values to the benchmark values from 1985 (when the index started). The results are also grouped by age, household income, and geographic region of the United States. The average value of all five survey sections determines the overall Consumer Confidence Index. The Conference Board releases the survey results at 10 a.m. on the last Tuesday of every month.

Most analysts warn against putting too much weight on month-to-month changes in CCI and instead focus on longer-term trends. In general, analysts view changes of more than 5% in the CCI as an indication of real economic change.

Why It Matters:
The CCI measures the degree of optimism consumers have about the economy and their personal finances. The notion is that when consumers feel optimistic, they tend to spend more. Thus, an uptick in the CCI can sometimes indicate coming demand and thus more jobs, higher salaries, more demand for capital, and maybe higher inflation. A downtick in CCI can indicate the opposite. This makes the CCI a particularly strong influence on the direction of retail stocks and a very important economic measure overall -- especially in the United States where consumer spending constitutes the majority of gross domestic product.

It is important to note the CCI is ultimately an opinion poll and is not based on actual hard data. Consumers may overreact or underreact to certain aspects of the economy, and their opinions will reflect this. Also, the survey measures consumer response to changes that have actually occurred, making the CCI is a lagging indicator. Thus, analysts often look to the CCI for confirmation of what they may already be suspecting in terms of economic direction.

What It Is:
The consumer price index (CPI) measures changes in consumer prices, and thus, inflation. The Bureau of Labor Statistics (BLS) calculates and publishes CPI data monthly. The CPI is the most recognized inflation measure in the United States.

How It Works/Example:
The CPI measures the change in the retail prices of approximately 80,000 specific goods and services, called the market basket. The goods and services fall into eight major categories: food and beverage, housing, apparel, transportation, medical care, recreation, education and communication, and other. The BLS updates the market basket every few years to remove obsolete items.

To get the data, BLS economic assistants call or visit approximately 23,000 stores and contact approximately 50,000 landlords or tenants in 87 urban areas every month to get prices on the items in the market basket. Commodity specialists review the information and make adjustments for changes in size or quality of the product.

The BLS then compares the cost of the market basket to the same basket in the base year (usually 1982-1984). To do this, the BLS sets the average price of the market basket during the years 1982, 1983, and 1984 to equal 100. Then in every subsequent period, the BLS calculates price changes in relation to that number. A resulting CPI of 120, for example, means that prices are 20% higher than they were in the base period. By comparing the difference in CPI in consecutive months or years, the BLS calculates the percentage increase in prices, giving us the inflation rate.

Why It Matters:
The CPI is perhaps the best way we have to gauge the amount of inflation in the economy. The effect of inflation directly or indirectly affects nearly every financial decision, from consumer choices to lending rates, from asset allocation to stock prices. By accurately measuring the amount of inflation, people, businesses, and the government are better able to make future financial decisions. For more information about the Bureau of Labor Statistics inflation measures, visit www.bls.gov/cpi