What is a consumer price index (CPI)?

For example, the consumer price index (CPI), a common measure of inflation, measures the price change over time for a basket of goods and services. A basket of goods represents consumer spending and is used to track changes in the prices of consumer goods and services over time.

What is a CPI market basket?

Specifically, the CPI measures the average change in price over time of a market basket of consumer goods and services. The market basket includes everything from food items to automobiles to rent. The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought.

How are the quantities of goods and services determined?

The quantities of goods and services in the Consumer Price Index are determined by surveying consumers. Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that