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Consumer Price Index (CPI)

The consumer price index (CPI) is calculated by tracking a weighted average basket of several goods over time. This metric is used to measure the purchasing power of a currency. CPI helps central banks and governments inform decisions about fair wages, rent, and prices.

The CPI will not perfectly reflect changes in prices. The CPI fails to account for substitutions consumers make based on prices. If a good becomes significantly more expensive consumers will simply buy less of it, replacing it for a similar good that is cheaper. The CPI also fails to account for technological innovation and newly created goods, because it must keep its basket consistent over time.