What does the Consumer Price Index measure?

The Consumer Price Index (CPI) is primarily designed to measure the average price level of a basket of consumer goods and services over time. It reflects the prices that households pay for the goods and services they consume, making it a key economic indicator for understanding inflation and cost of living changes. The CPI is calculated based on a representative sample of items bought by typical consumers, and any changes in this index indicate how the overall price level is fluctuating.

Although the CPI is closely related to inflation, which represents the rate at which prices increase over time, the index itself directly focuses on the average prices rather than the rate of change. This makes it an essential tool for economic analysis, particularly in assessing the purchasing power of consumers and making cost-of-living adjustments in wages and benefits.