Final answer:
A rise in the consumer price index (CPI) signifies an increased cost of living, resulting in inflation and a potential decrease in purchasing power if wages do not rise accordingly. The CPI measures urban consumers' expenses for a fixed basket of goods and services, thus reflecting inflationary trends that impact government policies and individual standard of living.
Step-by-step explanation:
Impact of Rising Consumer Price Index (CPI)
When the consumer price index (CPI) rises, it indicates an increase in the cost of living. Calculating the rise in cost of living involves determining the percentage increase in CPI, which in this example is given as (2244 - 2120) / 2120 = 0.0585 = 5.85%. The CPI measures the average change over time in the prices paid by urban consumers for a basket of goods and services, which is why it is often referred to as a cost-of-living index.
The rise in CPI leads to inflation, which erodes purchasing power meaning that consumers have to spend more money to buy the same amount of goods and services. Inflation affects government policy, businesses, and individual standard of living. If wages do not increase at the same rate as inflation, people's real income falls, and there may be a decline in the overall economic wellbeing of consumers.
It is important to note that although CPI is a useful indicator of changes in the cost of living, it is subtly different from the cost of living concept which also takes into account the level of satisfaction or utility derived from consumption. Nonetheless, CPI is widely used by government officials, including the President and the Federal Reserve Board, to inform monetary and fiscal policies and to index wage contracts to help maintain the standard of living.