Consumer Price Index (CPI)
- A statistical measure that tracks the weighted average of prices of a basket of goods and services consumed by households, used to measure inflation and the cost of living.
- The CPI is calculated by collecting prices of a representative sample of goods and services, and then weighting them according to their importance in the average household budget (monthly).
- The resulting index is used to measure the rate of inflation, and to adjust wages, pensions, and other benefits to keep pace with the cost of living.
Simple Version
The Consumer Price Index (CPI) is like a big basket of goods and services that people buy every day, and it tracks how much the prices of those things go up or down over time.
Example
The Consumer Price Index (CPI) is used by economists to measure the rate of inflation, and to determine whether the economy is growing or slowing down. For example, “The CPI rose by 2% last quarter, indicating a moderate level of inflation.”
Real World
The CPI is used by central banks to set interest rates, and by governments to adjust tax brackets and benefit payments.
Synonyms
- Similar: Inflation rate, Cost of living index, Price index, Retail price index
Etymology
- The concept of a consumer price index dates back to the 18th century, but the modern CPI was first developed in the United States in the 1930s.
Denotations
- The CPI is often used as a benchmark for inflation, but it has its limitations, such as not accounting for changes in the quality of goods and services.
Frequently Asked Questions
How is the CPI calculated?
The CPI is calculated by collecting prices of a representative sample of goods and services, and then weighting them according to their importance in the average household budget.
What is the difference between the CPI and the GDP deflator?
The CPI measures the price level of goods and services consumed by households, while the GDP deflator measures the price level of all goods and services produced within a country.
Why is the CPI important?
The CPI is important because it helps economists and policymakers understand the rate of inflation, and make informed decisions about monetary and fiscal policy.