Which statement accurately describes how the Consumer Price Index (CPI) is measured?

Which statement accurately describes how the Consumer Price Index (CPI) is measured?

• A. CPI excludes housing costs and tracks only food and energy prices.
• B. CPI measures changes in the prices of all goods and services in the economy as a whole.
• C. CPI tracks changes in the price of a fixed basket of goods over time.
• D. CPI is the same as the unemployment rate.

Answer: (C)

CPI measures changes in the cost of living by following a fixed basket of goods and services that reflect what households typically buy. By keeping the basket constant, any rise or fall in the index comes from price changes, not from people switching what they purchase. The basket is weighted to match average spending patterns and prices are collected for a broad range of items—housing, food, transportation, and more—so the index shows how much the typical consumer’s purchases would cost over time. This is different from other measures like the GDP deflator, which covers all produced goods and services and uses current quantities, or the unemployment rate, which tracks labor market conditions rather than prices.

CPI measures changes in the cost of living by following a fixed basket of goods and services that reflect what households typically buy. By keeping the basket constant, any rise or fall in the index comes from price changes, not from people switching what they purchase. The basket is weighted to match average spending patterns and prices are collected for a broad range of items—housing, food, transportation, and more—so the index shows how much the typical consumer’s purchases would cost over time. This is different from other measures like the GDP deflator, which covers all produced goods and services and uses current quantities, or the unemployment rate, which tracks labor market conditions rather than prices.