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Consumer Price Index

The Consumer Price Index (CPI) is a widely used economic indicator that measures changes in the average prices of a basket of goods and services purchased by consumers over time. This basket includes items such as food, housing, transportation, healthcare, education, clothing, and other goods and services. It serves as a crucial tool for understanding inflation and assessing the cost of living for consumers.

What You Need To Know

The CPI measures the percentage change in the price of the basket of goods and services over a specific period, typically on a monthly or annual basis. It uses a designated base year as a reference point to calculate price changes. The index value in the base year is set to 100. Subsequent CPI values are expressed relative to the base year, making it easier to compare changes in prices over time.

The CPI is a weighted average, meaning that the prices of individual items in the basket are weighted according to their significance in typical consumer spending. Items with higher spending importance have a greater influence on the overall CPI.

Economists, policymakers, and businesses use the CPI to gauge the inflation rate and adjust wages, pensions, and social security benefits. Central banks also use the CPI to formulate monetary policy.

The CPI has some limitations, such as the inability to fully capture changes in consumer behavior or account for the quality improvements in products over time. Additionally, individual spending patterns may differ from the average consumer basket.