What does the Consumer Price Index (CPI) measure?

The Consumer Price Index (CPI) measures the average change in prices paid by urban consumers for a basket of goods and services over time. This index is a critical economic indicator as it reflects the purchasing power of consumers and is used to assess inflation levels. The CPI is calculated by taking price changes for each item in a predetermined basket of goods and averaging them, weighted by the importance of each item to the overall spending habits of the urban population.

By focusing on the prices of a variety of everyday goods and services, the CPI provides insights into how the cost of living is changing for ordinary consumers. This makes it an essential tool for economic analysis, policy-making, and adjustments in economic indicators like Social Security payments and interest rates.

In contrast, the other options do not accurately describe the CPI. The total employment in an economy relates to labor market conditions, the average income of households in urban areas pertains to income metrics, and the overall economic growth rate measures the rise in national output, which are all separate economic concepts from the specific function of the CPI.