The Consumer Price Index (CPI) is the most widely used measure of inflation. It tracks the average price change of a "basket" of goods and services that a typical household buys — food, housing, transportation, healthcare, clothing, and entertainment.
Here is how it works: statistical agencies pick a representative basket of 200-300 items and track their prices monthly. If the basket cost $100 last year and $105 this year, the CPI increased 5% — meaning inflation is 5%. The base year is set to 100, and all future measurements compare against it.
CPI directly affects your life. It determines Social Security adjustments, tax bracket changes, wage negotiations, and central bank interest rate decisions. In India, CPI inflation is the RBI's primary target — they aim for 4% (with a 2-6% tolerance band). The US Federal Reserve also targets 2% inflation using CPI and PCE (Personal Consumption Expenditure) data.