Consumer Price Index (CPI)

Statistics agencies regularly track the prices of hundreds of items that households commonly buy, such as food, rent, transport, clothing, energy, healthcare and entertainment. Each item is given a weight according to how much households typically spend on it, so a rise in rent has a bigger effect on the index than a rise in the price of matches.

The index starts at a base value, often 100, in a chosen base year. If the same basket costs 4% more a year later, the index rises to 104, and inflation is 4%.

For example, if the CPI rises from 120 to 126 over a year, prices have risen by 5% on average.

The CPI is used in many ways. Central banks use it to set interest rate policy, and many aim to keep CPI inflation around a target such as 2%. Governments use it to adjust pensions, benefits and tax thresholds. Employers and unions refer to it in wage negotiations.

The CPI measures an average household. Individual experiences vary: a household that spends heavily on rent or fuel may face higher inflation than the CPI shows. Economists also watch core inflation, which excludes volatile items such as food and energy.