Q: What is CPI and how CPI can measure inflation?

A:

The Consumer Price Index (CPI) 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. It is calculated by taking
price changes for each item in the predetermined basket of goods and averaging them. Changes in the
CPI are used to assess price changes associated with the cost of living.

The consumer price index (CPI) is the most widely used measure of consumer price inflation. The CPI
measures the average change over time in the prices paid by urban consumers for goods and services.
To compute the rate of inflation between two time periods, calculate the percent change in the
appropriate CPI index from the first period to the second period. The following example computes the
change in the Seattle CPI from 2012 to 2017:

2012 Seattle CPI index 167.7

2017 Seattle CPI index 192.3

Change in index 24.6

Compute percent change (24.6 / 167.7) * 100 = 14.7

Percentage of inflation 14.7 percent