Consumer Price Index
Definition
The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.
How This Affects Us
If you borrow $1,000 from your best friend and tell him you will pay him back in one year with interest, how do you calculate how much interest there should be? This is what the CPI illustrates. If the CPI numbers come out and are 5.2% a year than we know things are 5.2% more expensive this year. So you would need $1052 to equal your $1,000 from the year before. So there is your interest rate, 5.2%. If you do your homework and track inflation. You should monitor changes in inflation and look for the markets to adjust interest rates. Knowing where interest rates are headed is a huge advantage in the financial world. This is why the CPI is the most followed indicator of inflation.