What is the Consumer Price Index? (CPI)

Written By Minh Tong
Mar 3, 2023
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The Consumer Price Index (CPI) is a measure of the average change in prices over time that consumers pay for a basket of goods and services. 

It is used by governments, central banks, and other financial organizations to measure inflation and make economic decisions. 

The CPI is based on prices collected from retailers, which are then weighted according to their importance in the economy. This allows policymakers to understand how much prices have changed relative to the same period the previous year, helping them gauge the pace of inflation and make adjustments accordingly. 

The CPI gives an overall view of what’s happening with prices in an economy—and helps provide insight into why certain policy decisions may or may not be effective. 

In addition, it can also be used to determine wages and benefits, such as social security payments. By providing a comprehensive overview of the cost of goods and services, the CPI is an invaluable tool for understanding economic trends.

What does the Consumer Price Index Measure?


The CPI measures the average prices of a representative sample of services and goods in an economy, including food, housing, clothing, transportation, health care costs and more. 

By tracking the cost of these items over time, it gives policymakers insight into how changes in inflation affect the purchasing power of citizens. This helps them make decisions about interest rates, taxes and government spending that can influence economic activity. 

The CPI also provides valuable information to businesses when determining wages and setting prices for their products or services.  The CPI is an important tool in understanding consumer behavior and monitoring economic trends.  


How does the CPI affect the stock market?


The CPI is closely watched by investors because it provides insight into the direction of inflation levels in an economy. 

When there is a significant increase in the CPI, investors may become concerned that prices could begin to rise quickly, which could then lead to decreased profits and lower stock market returns. 

Conversely, when the CPI shows evidence of deflation, it can encourage investors as they may expect higher returns due to more affordable goods and services. As such, the Consumer Price Index plays an important role in how financial markets behave and helps inform investment decisions.


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