Consumer Price Index:

The consumer price index (CPI) tells us about the average changes over time in the prices of a fixed group of goods and services that are bought by consumers. The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies. An interesting example is the use of the CPI as a deflator of the value of the consumer's dollar to find its purchasing power. The purchasing power of the consumer's dollar measures the change in the value to the consumer of goods and services that a dollar will buy at different dates. In other words, as prices increase, the purchasing power of the consumer's dollar declines. The CPI is based on prices of food, clothing, housing, fuels, transportation fares, charges for medical services, drugs, and other goods and services that people buy for day-to-day living. Inflation has been defined as a process of continuously rising prices or equivalently, of a continuously falling value of money. Various indexes have been devised to measure different aspects of inflation. The CPI measures inflation as experienced by consumers in their day-to-day living expenses; hence it is considered as the "best" measure of inflation for a given application depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase at today's prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period.