Consumer price index (CPI)

The consumer price index or CPI is a key economic measure that tracks changes and the average price level of a set basket of consumer goods and services over time. The CPI shows how much prices are rising or falling for items like food, clothing, transportation, and housing. When inflation is reported at 6%, this is often based on changes in the CPI. The CPI gauges the cost of living and shows how much currency can buy. A rising CPI indicates inflation, reducing purchasing power. CPI figures are vital for economic planning and adjusting wages and benefits. The calculation of the CPI involves several steps to capture how price changes affect consumers. First, a representative market basket is constructed, including hundreds of goods and services that urban households frequently buy. The selection and weighting of items reflect actual spending patterns with housing, transport, and food, accounting for the largest shares. Price data are collected across many locations, and changes are measured relative to a base year, assigned an index value of 100. Regular updates ensure the CPI remains relevant. Consumer price index is widely used to measure inflation and influences central bank policy and wage contracts. Policymakers track the consumer price index to decide whether to adjust interest rates while workers and businesses use it to negotiate cost of living adjustments. However, the consumer price index has limitations.