What is a consumer price index (CPI) and how is it used?

The Consumer Price Index (CPI) is a measure of the average change in prices over time of a basket of goods and services typically consumed by households. It is used to track inflation by comparing the cost of the basket in the current period to a base period. The CPI reflects the cost of living and is an important tool for policymakers, as it helps central banks and governments assess whether inflation is within target ranges. A rising CPI indicates that prices are increasing, while a declining CPI signals deflation. The CPI is used to adjust wages, pensions, and social benefits, ensuring they keep up with changes in living costs.