What does the Consumer Price Index (CPI) measure?

The Consumer Price Index (CPI) is specifically designed to measure the average change over time in the prices paid by consumers for a typical basket of goods and services. This basket typically includes a wide array of items such as food, clothing, transportation, and medical care, reflecting the spending habits of households. The CPI is a crucial economic indicator, as it helps gauge inflation by showing how the purchasing power of money changes over time. When the CPI increases, it indicates that prices are rising, and consequently, the inflation rate is also increasing.

This measurement provides valuable insights into the cost of living and economic stability, making it essential for policymakers, businesses, and consumers. By focusing on a typical set of goods, the CPI allows for the assessment of price changes relative to everyday expenses, capturing the economic experiences of regular consumers effectively.