What is the purpose of the consumer price index (CPI)?

The consumer price index (CPI) is a crucial economic indicator that serves the primary purpose of assessing changes in the inflation rate. It measures the average change over time in the prices paid by typical consumers for a basket of goods and services, reflecting various components of typical household expenditures. By tracking these price changes, the CPI provides insight into the purchasing power of consumers and the overall cost of living, allowing for comparisons over different time periods.

The CPI is particularly important for policymakers and economists as it helps in formulating monetary and fiscal policies. When inflation is rising, for instance, policymakers may decide to adjust interest rates to stabilize the economy. Therefore, understanding inflation's movement through the CPI is key to economic analysis and decision-making.