What does the consumer price index (CPI) measure?

The consumer price index (CPI) is a vital economic measure that tracks changes in the price level of a specific basket of consumer goods and services over time. This basket typically includes a variety of categories such as food, housing, clothing, transportation, and healthcare, which reflect the typical spending habits of households. By measuring how the prices of these goods and services change, the CPI provides insight into inflation levels and helps to indicate the overall cost of living for consumers.

It serves as a necessary tool for policymakers, economists, and businesses as they analyze economic conditions. Increases in the CPI suggest that the purchasing power of consumers is decreasing, which can influence monetary policy and economic decisions. The importance of the CPI lies in its ability to assess economic health and inform various important economic indicators, such as inflation rates and adjustments in wages and government benefits.

Other options do not accurately describe the CPI. For instance, the effectiveness of government spending relates more to fiscal policy outcomes rather than price changes. Similarly, measuring economic inequality involves different metrics, such as the Gini coefficient, which examines income distribution rather than consumer prices. Lastly, the overall growth rate of gross domestic product (GDP) focuses on economic output, a distinct concept from the CPI's focus on