What is the impact of the CPI on inflation targeting by central banks?

What is the impact of the CPI on inflation targeting by central banks?

The Consumer Price Index (CPI) plays a crucial role in inflation targeting by central banks. Inflation targeting refers to the monetary policy framework where central banks set specific inflation targets and adjust their policies accordingly to achieve those targets.

The CPI measures the average change in prices of a basket of goods and services consumed by households over time. It provides a reliable indicator of inflation and helps central banks monitor and assess the current and future inflationary pressures in the economy.

Central banks use the CPI as a key reference point to determine whether inflation is within their target range or not. If the CPI indicates that inflation is above the target, central banks may implement contractionary monetary policies, such as raising interest rates or reducing money supply, to curb inflationary pressures. Conversely, if the CPI suggests that inflation is below the target, central banks may adopt expansionary monetary policies, such as lowering interest rates or increasing money supply, to stimulate economic growth and raise inflation.

Therefore, the CPI directly influences the decision-making process of central banks in setting and adjusting their monetary policies to achieve their inflation targets. It serves as a vital tool for central banks to maintain price stability and promote sustainable economic growth.