Which method is commonly used to measure inflation?

The Consumer Price Index (CPI) is the method commonly used to measure inflation. The CPI tracks changes in the price level of a basket of consumer goods and services, providing a statistical estimate of the average price change over time. This measurement is crucial for understanding inflation because it reflects the cost of living and how much purchasing power consumers have.

By regularly updating the basket of goods and services to reflect current consumption patterns, the CPI helps policymakers, economists, and the public gauge inflation trends accurately. This index is widely utilized in economic analysis, influencing monetary policy decisions and cost-of-living adjustments in wages and pensions.

In contrast, Gross Domestic Product (GDP) measures the total economic output of a country and is not specifically focused on price changes. The Balance of Trade (BOT) evaluates the difference between a nation’s exports and imports, providing insight into trade dynamics rather than inflation. The Interest Rate Index (IRI), while related to financial markets and economics, does not measure inflation directly, as it reflects the cost of borrowing money and can influence investment and consumption rather than prices of goods and services. Thus, CPI is the most effective and commonly accepted measure for inflation.