Consumer Price Index (CPI) is a type of economic tool that is utilized for the purpose of measuring stated factors in the economy at a given point in time. The relationship between inflation and CPI is derived from the use of CPI as a tool for measuring the level of inflation in a given economy. Generally, inflation is used in reference to any increase in time to a steady number of goods, which will be monitored over the stated time frame, ranging from a monthly calculation of such an increase to an annual calculation of the same. Concerning the connection between Inflation and CPI, the rate of inflation for the factors under consideration will be included in the report of the CPI measurement at the end of each month, and a general annual calculation for the rate of inflation will be included at the end of each year. The importance of measuring the rate of inflation and CPI is the fact that such a measurement allows interested parties like economists, business people, students and various governments to compare the stated goods as a way of determining what changes may have occurred in them.
An example of this link between inflation and CPI can be demonstrated by considering a number of random items in a hypothetical basket. Assuming these include various food items, clothing materials, services and other types of goods, at the end of each month the different prices of the items will be collated and compared to the previous month as a means of assessing any type of increase in the prices of the goods. Where the prices may have increased, this will be an indication of a rising level of inflation. The exact percentage of the inflation level will be determined by subtracting the previous CPI figure from the current one. If the difference between the two figures amounts to a two percent increase in inflation, then this will serve as a guide to the direction in which the general economy is heading.
The same also applies where the CPI level decreases with a consequent reduction in the level of inflation. Inflation and CPI measurements can also be used to determine the rate of annual inflation increase or decrease. One of the reasons it is necessary to monitor the changes in inflation and CPI is the relationship the two concepts have to the ability of the currency to purchase the basket of goods. Where the inflation is higher, more money will be required to purchase the fixed goods, while less will serve the same purpose in the case of an inflation decrease.