What is the Consumer Prices Index? CPI explained

The Consumer Prices Index (CPI) is a measure of the average change in the prices of a basket of goods and services consumed by households. It is used as a measure of inflation, as well as a tool for indexing the value of money over time.

The CPI is calculated by the Office for National Statistics (ONS) in the United Kingdom, and is based on a basket of goods and services that is representative of the consumption patterns of the average household. The basket is updated periodically to ensure that it remains representative of current consumption patterns.

The price of each item in the basket is measured at regular intervals, and the CPI is calculated as the percentage change in the overall price of the basket between two periods. For example, if the CPI was 100 in January and 110 in December, this would indicate that the average price of the basket of goods and services had increased by 10% over the course of the year.

The CPI is often used as a measure of inflation, as it reflects the changes in the cost of living experienced by households. It is also used to index the value of money over time, by adjusting for the effects of inflation on the purchasing power of money.

For example, if the CPI increased by 10% over the course of a year, this would mean that the same basket of goods and services that cost £100 in the previous year would now cost £110. The purchasing power of £100 would therefore have decreased by 10% due to the increase in prices.

The CPI is used by governments, businesses, and individuals to adjust for the effects of inflation on the value of money. For example, governments may use the CPI to adjust the value of social security payments or the minimum wage, in order to ensure that these payments keep pace with the cost of living. Businesses may use the CPI to adjust the prices of their goods and services, or to adjust the value of financial instruments such as bonds and loans.

Overall, the CPI is an important measure of the cost of living and the purchasing power of money, and is widely used as a tool for indexing the value of money over time.

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