HISET Social Studies Practice

How does the Consumer Price Index affect consumers?

1. It helps increase wages automatically

2. It serves as a guide for inflation and purchasing power

3. It determines interest rates for loans

4. It establishes government budgets

The correct answer is: It serves as a guide for inflation and purchasing power

The Consumer Price Index (CPI) is a critical economic indicator that reflects the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is used to gauge inflation, which affects consumers directly by influencing their purchasing power. When the CPI rises, it indicates that the cost of living is increasing, meaning that consumers can buy less with the same amount of money. This decrease in purchasing power can lead to adjustments in consumer behavior, such as cutting back on spending, seeking cheaper alternatives, or anticipating future price increases. Conversely, if the CPI is stable or falls, it suggests that prices are not rising significantly, which can give consumers more confidence in their spending abilities. Understanding the CPI allows consumers to be more informed about the overall economic environment, potentially affecting their decisions on savings, investments, and expenditures. This correlation between the CPI and inflation is why option B is the most accurate and relevant answer to how the Consumer Price Index affects consumers.