Consumer Price Index (CPI)

Lesson

The Consumer Price Index (CPI) measures the average price change urban consumers pay for a fixed basket of goods and services over time. It is a widely used indicator of inflation and is often used to adjust wages, benefits, and other economic variables for changes in the cost of living.

Practice Question #1

What does the Consumer Price Index (CPI) measure?

A) The average change in prices paid by urban consumers for a fixed basket of goods and services over time.

B) The average change in prices received by domestic producers for their output.

C) The price level of all domestically produced final goods and services in an economy.

D) The prices of goods and services purchased by consumers in the United States.

Select an option above to see an explanation here.

A) The CPI measures the average change in prices paid by urban consumers for a fixed basket of goods and services over time. B) This describes the Producer Price Index (PPI). C) This describes the GDP deflator. D) This describes the Personal Consumption Expenditures (PCE) index.

Terms

Consumer Price Index (CPI):: A measure of the average change in prices paid by urban consumers for a fixed basket of goods and services over time.
Inflation:: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
Deflation:: The opposite of inflation, a decrease in the general price level of goods and services.
Market basket:: A collection of goods and services used to represent the consumption patterns of a typical consumer.
Core CPI:: A measure of inflation that excludes volatile items such as food and energy prices.

Practice Question #2

Which of the following is excluded from the Core CPI?

A) Housing

B) Apparel

C) Food

D) Medical care

Select an option above to see an explanation here.

A) Housing is included in the Core CPI. B) Apparel is included in the Core CPI. C) Food is excluded from the Core CPI, as it is considered volatile. D) Medical care is included in the Core CPI.

Do Not Confuse With

Producer Price Index (PPI):: A measure of the average price change received by domestic producers for their output.
Personal Consumption Expenditures (PCE) index:: A measure of the prices of goods and services consumers purchase in the United States.

Practice Question #3

How is the Consumer Price Index (CPI) most commonly used by investors?

A) To predict future stock prices.

B) To gauge the inflation rate.

C) To determine the purchasing power of a currency.

D) To measure the growth of the economy.

Select an option above to see an explanation here.

A) CPI is not a direct tool for predicting future stock prices, although it might provide useful context. B) CPI is most commonly used by investors to gauge the inflation rate, as it measures the average change in the prices paid by urban consumers for goods and services over time. C) Although CPI can help investors understand the effects of inflation on purchasing power, it is not a direct measure of purchasing power. D) The growth of the economy is typically measured by GDP, not CPI.

Historical Example

In the 1970s, the United States experienced a period of high inflation, with the CPI increasing by more than 10% in some years. This led to a decrease in purchasing power for consumers and contributed to economic stagnation during that decade.