Final answer:
The Consumer Price Index (CPI) is the inflation measure based on a market basket of goods and services representing the typical household's purchases. It is a central indicator of cost of living and is adjusted periodically to mitigate biases.
Step-by-step explanation:
The measure of inflation that is based on a market basket of goods and services for a typical household is the Consumer Price Index (CPI). The CPI is compiled by the U.S. Bureau of Labor Statistics and reflects the purchases of the average family of four. It is designed to indicate the change in the total cost of buying a fixed basket of goods and services over time, providing an estimate of the cost of living and how inflation impacts households. The fixed basket represents what the typical consumer buys, and as such, the CPI is sometimes referred to as the cost-of-living index. However, there are challenges with this method, such as the substitution bias and quality/new goods bias, which are addressed by updating the basket of goods periodically. In contrast, other measures of inflation like the GDP deflator encompass a wider range of goods, many of which are not purchased by households.