Consumer Price Index (CPI)
Definition
A measure of inflation that tracks price changes for a basket of goods and services bought by typical consumers. If CPI is 3%, prices rose 3% on average. The Fed uses CPI to set interest rate policy.
Why It Matters
CPI tells you if your purchasing power is growing or shrinking. If your salary rises 2% but CPI is 3%, you got a pay cut. If your investments return 5% and CPI is 2%, your real return is 3%.
Example
CPI rises 3% in a year. A $4 coffee costs $4.12. Your $50,000 salary should rise to $51,500 to maintain the same purchasing power. If it doesn't, inflation eroded your salary's value.