Consumer Price Index (CPI)
Plain definition
The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a fixed basket of goods and services — housing, food, transport, medical care, and more. It is the most widely cited gauge of inflation.
In economics
CPI is the inflation number in headlines and contracts: Social Security benefits, tax brackets, and many wage agreements are indexed to it. Economists compute inflation as the percentage change in CPI over 12 months. Its fixed-basket design has known biases — substitution bias (consumers switch from pricier goods) and quality-change bias — which is why some prefer chained or PCE-based measures, but CPI remains the standard reference.
Example
If the CPI is 300 this January and was 290 last January, annual inflation is (300 - 290) / 290 x 100 = 3.4%. A retiree whose pension is CPI-indexed would receive roughly a 3.4% cost-of-living increase to preserve purchasing power.
CPI inflation is often confused with the inflation any one person experiences. CPI tracks an average urban basket — your personal inflation depends on your spending (renters feel housing, drivers feel gas). It is also not a cost-of-living index in the strict sense, and it excludes investment assets like stocks and house prices as assets.