What does the Consumer Price Index (CPI) measure?

The Consumer Price Index (CPI) measures the weighted average of prices for a basket of consumer goods and services, which typically includes items such as food, clothing, rent, healthcare, and transportation. This index is important because it reflects the cost of living and helps to gauge inflation by indicating how much prices have increased or decreased over time.

When CPI increases, it suggests that the general price level of the consumer goods and services in the economy is rising, which can erode purchasing power. Conversely, a decreasing CPI indicates that prices are falling. The CPI is a critical indicator for economic policy decisions, affecting monetary policy, cost-of-living adjustments, and social security benefits.

In contrast, other options do not align with the definition or purpose of the CPI. Average household income reflects earnings rather than price levels, total production output relates to the overall economic activity as measured by Gross Domestic Product (GDP), and changes in unemployment rates provide insights into job market trends but do not focus on price levels. Thus, the correct understanding of the CPI is linked specifically to measuring the pricing of consumer goods and services.