Consumer Price Index (or CPI, or cost-of-living index) is an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, medical care, and transportation. The CPI is published monthly.
It 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.
The CPI is important, as it measures inflation, which is one of the greatest threats to a healthy economy. Thus, its most significant function is to be used by the government to determine whether economic policies need to be modified to prevent inflation. Second, the CPI is used to adjust prices in other government economic indicators, such as Gross Domestic Product, or GDP. Third, the index is used to adjust benefit levels for recipients of various government programs.