- It is 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 is one of the most frequently used statistics for identifying periods of inflation or deflation. This is because large rises in CPI during a short period of time typically denote periods of inflation and large drops in CPI during a short period of time usually mark periods of deflation.
- The prices of goods and services fluctuate over time, but when prices change too much and too quickly, the effects can shock an economy. The CPI is the principle gauge of the prices of goods and services and indicates whether the economy is experiencing inflation, deflation or stagflation.
- It plays a role in many key financial decisions, including Federal Reserve, interest rate policy and the hedging decisions of major banks and corporations. Individual investors can also benefit from watching the CPI when making hedging and allocation decisions.
- The CPI is often used to adjust consumer income payments for changes in the dollar’s value and to adjust other economic series.