The Consumer Price Index, or CPI, is an important economic indicator because it shows how the cost of living changes over time. By tracking price movements across everyday goods and services like food, housing, transport, and healthcare, CPI helps measure inflation in a practical, consumer-focused way. Inflation directly affects purchasing power, so CPI gives a clear picture of whether people can buy more or less with the same income.

CPI also plays a key role in policy decisions. Central banks such as the Federal Reserve closely monitor CPI when setting interest rates. If CPI rises too quickly, policymakers may tighten monetary policy to slow inflation. If it remains low, they may support growth through lower rates. Because of this, CPI often moves financial markets immediately after release.

Governments and businesses rely on CPI for planning. Wages, pensions, tax brackets, and social benefits are often adjusted using CPI to maintain living standards. For households, CPI influences salary negotiations and long-term budgeting decisions.

For traders and investors, CPI acts as a signal of economic direction. Higher than expected inflation can affect currencies, bonds, stocks, and commodities. While CPI is not perfect and does not reflect every individual’s expenses, it remains one of the most widely trusted indicators for understanding inflation trends, economic stability, and policy outlook.