What is the role of the Consumer Price Index (CPI) in policy making?

The Consumer Price Index (CPI) serves a crucial role in policy making by providing essential data for assessing inflation. By measuring the average change over time in the prices paid by consumers for a basket of goods and services, CPI acts as a primary indicator of inflation levels in the economy. Policymakers, particularly those in central banks, utilize this data to make informed decisions regarding monetary policy, including adjustments to interest rates. When inflation levels rise significantly, central banks may decide to increase interest rates to curb spending and bring inflation under control. Conversely, low inflation may lead to lower interest rates to encourage economic growth. Hence, the CPI is vital for identifying trends in inflation and guiding the formulation and adjustment of macroeconomic policy.