Also called headline inflation or inflation rate.
A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.
CPI figures are often used to determine monetary policy and to set benchmark rates. Many Central Banks have inflationary targets that are based off of the CPI data that is typically giving in YOY (year-over-year) and MOM (month-over-month) format. If the target for inflation is between 1.5 to 2.0% and the CPI comes in at 2.5% it warrants measures to contain inflation which includes the possibility of increasing the benchmark rates.
Many criticisms of this method revolve around the the problem that CPI data does not accurately reflect the actual inflation. This is clearly seen from prices paid by the consumer when getting fuel, buying groceries, and other essential cost of living that everyone can clearly see in the real world. This can end up really hurting a society and it's economy in the long run by underestimating the real inflation.
