What is a key indicator of inflation in an economy?

The consumer price index (CPI) is a crucial indicator of inflation in an economy. It measures the average change over time in the prices paid by consumers for a basket of goods and services. By tracking the changes in the cost of this basket, the CPI reflects how inflation affects the purchasing power of money for consumers.

When the CPI increases, it indicates that consumers need to spend more money to purchase the same goods and services, signaling a rise in the overall price level in the economy. Consequently, this change in consumer prices directly correlates with inflation, as higher prices generally mean that inflation is occurring.

In contrast, the unemployment rate measures the percentage of the labor force that is unemployed and looking for work, which does not directly indicate inflation. The interest rate can influence inflation—if interest rates rise, borrowing decreases, which can slow economic growth and potentially lower inflation—but it is not a direct measure of inflation itself. Stock market performance is influenced by numerous factors, including investor confidence and economic indicators, but it does not provide a specific measure of inflation trends.