Consumer price index is referred to as that index that is used in calculating the retail inflation in the economy by tracking the changes in prices of most commonly used goods and services.
In other words, the consumer price index calculates the changes in price of a common basket of goods and services. It is also called a market basket and is used for calculating the price variations in fixed items.
The market basket that is used by CPI in calculating price changes represents the most common goods and services that are consumed within the economy and is therefore the weighted average for those goods and services.
The items that are considered as a basket are goods related to food, clothing, transportation, housing, electronics, apparels, education, medicine, etc.
CPI can be used to calculate the cost of living of the people of a country and also the changes in the purchasing power of the currency of a nation.
CPI detects the price changes of the items falling under the common basket and by averaging those prices.
Importance of CPI:
CPI is a widely used measure for determining inflation in an economy. Rising inflation results in the diminishing standard of living for the residents of a nation. Over a period of time, it will result in an increase in the cost of living.
A high inflation rate will result in increase in prices of goods and as a result there will be less manufacturing, which will result in loss of jobs.