Which statement best describes the Consumer Price Index (CPI)?

Which statement best describes the Consumer Price Index (CPI)?

• A. Measures the cost of production in factories.
• B. Measures the stock market index.
• C. Measures the cost of the market basket of a typical urban American family.
• D. Measures the price of rural households.

Answer: (C)

The main idea being tested is how the CPI captures inflation from the consumer’s perspective. The CPI tracks how the prices of a fixed market basket of goods and services—representing what a typical urban American household buys—change over time. By comparing these price changes, it reflects how the cost of living for urban consumers rises or falls. This is different from measuring production costs in factories, which is what a producer price index would do, or from tracking the stock market, which is about financial asset prices, or from focusing on rural households, which isn’t what the CPI for urban consumers covers. So describing the CPI as measuring the cost of the market basket of a typical urban American family is the best fit because it exactly captures the consumer-focused inflation concept the index is built to measure.

The main idea being tested is how the CPI captures inflation from the consumer’s perspective. The CPI tracks how the prices of a fixed market basket of goods and services—representing what a typical urban American household buys—change over time. By comparing these price changes, it reflects how the cost of living for urban consumers rises or falls. This is different from measuring production costs in factories, which is what a producer price index would do, or from tracking the stock market, which is about financial asset prices, or from focusing on rural households, which isn’t what the CPI for urban consumers covers. So describing the CPI as measuring the cost of the market basket of a typical urban American family is the best fit because it exactly captures the consumer-focused inflation concept the index is built to measure.