What does the consumer price index measure?

The consumer price index (CPI) specifically measures changes in the prices of a selected basket of consumer goods and services over time. It serves as a key indicator of changes in the cost of living and inflation. The CPI is calculated by comparing the current prices of a specific set of goods and services to their prices in a base year, allowing analysts and policymakers to understand how purchasing power and living costs are changing for consumers.

By focusing on a representative sample of goods and services that consumers typically purchase, the CPI reflects the inflation experienced by the average household. This is essential for economic analysis, helping to inform decisions regarding monetary policy, wage adjustments, and cost-of-living allowances.