What economic indicator shows the relationship between inflation and consumer purchasing power?

The Consumer Price Index (CPI) is the correct answer because it specifically measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. This index serves as a crucial indicator of inflation, reflecting how much prices have risen and thus how inflation impacts consumer purchasing power.

When inflation is high, the CPI increases, indicating that consumers need to spend more money to purchase the same amount of goods and services they could buy before. Therefore, by tracking changes in the CPI, one can assess the erosion of purchasing power due to inflation; as prices rise and purchasing power decreases, the CPI provides a tangible measure of this relationship.

In contrast, the inflation rate is a measure of the percentage change in prices over a specific period, but it does not alone depict the direct impact on consumer purchasing power in the way that the CPI does. Purchasing power parity is an economic theory that compares different countries' currencies through a “basket of goods” approach, and while it relates to purchasing power, it does not measure inflation directly. Real GDP indicates the total value of all goods and services produced by an economy adjusted for inflation but does not specifically address the relationship between inflation and consumer purchasing power.