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Measuring the Price Level and Inflation

4 important questions on Measuring the Price Level and Inflation

The consumer price index (CPI) is:

For any period, it measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year.
So: CPI = cost of base year basket of goods and services in the current year / cost of the base year basket of goods and services in the base year

The CPI is not itself the price of a specific good or service, it is a price index, this is:

A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year.

The CPI provides a measure of the average level of prices relative to prices in the base year. Inflation, by contrast, is a measure of how fast the average price level is changing over time. The rate of inflation is defined as:

The annual percentage rate of change in the price level, as measured, for example, by the CPI

Four of the most important true economic costs of inflation are:

Inflation creates static, or 'noise', in the price system, obscuring the information transmitted by prices and reducing the efficiency of the market system.
Inflation can produce unintended changes in the taxes people pay, which in turn may cause them to change their behavior in economically undesirable ways.
Unexpected changes in the rate of inflation can impose costs and benefits on parties to fixed nominal contracts.
Inflation tends to infer with the long run planning of households and firms.