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The consumer price index is the graphical representation which measures changes in the price level of consumer goods and services purchased by households. Inflation is measured using CPI. The percentage change in this index over a period of time gives the amount of inflation. The Bureau of Labor statistics surveys the prices of more than 80,000 items to create the index. It represents the cross-section of goods and services commonly bought by primarily urban households. They represent 87 percent of the U.S. population.
Purpose of the consumer price index:
For framing economic policies: Inflation is one of the greatest threats to a healthy economy. The CPI measures inflation, therefore, the federal government uses it to determine whether economic policies need to be modified to prevent inflation. Second, the government agencies use CPI to adjust prices in other government economic indicators, such as gross domestic product. Third, the government uses it to improve benefit levels for recipients of social security and other government programs.
Measuring household inflation: Another purpose of the CPI is to measure price inflation facing households as consumers. This measure is primarily for the use in macroeconomic management, and also has some possible uses in contracts where an index of prices for household consumption items is appropriate. Of course, as the CPI measures only household’s price experience, it is a measure of economy-wide inflation.
Purchasing power: A CPI is designed to measure the purchasing power of money incomes, it is concerned with answering questions such as how much income is required today to purchase the same basket of goods and services that was purchased in the base period.
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