What is CPI and its function

The Consumer Price Index (CPI) is a commonly used measure that examines the average change over time in prices paid by consumers for a basket of goods and services. It is a key economic indicator used to track inflation and price stability in an economy.

Here are some key points about the CPI:

1. **Calculation**: The CPI is calculated by comparing the current cost of a fixed basket of goods and services with the cost of the same basket in a base period. The index is expressed as a percentage relative to the base period.

2. **Components**: The basket of goods and services in the CPI typically includes items such as food, housing, clothing, transportation, healthcare, and education. The weights of these items are based on their relative importance in the average consumer's expenditure.

3. **Inflation**: The CPI is commonly used to measure inflation, which is the rate at which the general level of prices for goods and services is rising. By tracking changes in the CPI over time, policymakers, economists, and investors can monitor inflation trends.

4. **Uses**: The CPI is used for various purposes, including adjusting salaries and pensions for inflation, determining cost-of-living adjustments, indexing government benefits, and informing monetary policy decisions.

5. **Core CPI**: In addition to the overall CPI, there is a measure known as core CPI, which excludes volatile food and energy prices. Core CPI provides a more stable measure of underlying inflation trends.

Overall, the Consumer Price Index is a valuable tool for understanding how prices are changing in an economy and is widely used for economic analysis and policy-making.