How is inflation typically measured?

Inflation is typically measured using the Consumer Price Index (CPI), which tracks changes in the price level of a basket of consumer goods and services over time. The CPI provides a way to measure how prices are changing for everyday items such as food, clothing, and housing. By monitoring the changes in prices for these goods and services, economists can gauge the inflation rate, which reflects how purchasing power is eroding over time due to rising prices.

The CPI is a key indicator because it influences economic policy and helps inform decisions regarding interest rates and cost-of-living adjustments for wages and benefits. Its broad scope captures the average consumer's experience with price changes, making it a critical tool for understanding economic conditions and trends related to inflation.

Other methods like the Producer Price Index (PPI) also measure inflation from the perspective of the producers, but the CPI is more directly related to the costs faced by consumers. Gross Domestic Product measures overall economic output, while the employment rate focuses on job growth and labor market conditions rather than inflation itself.