Final answer:
Inflation is most accurately measured by the percentage change in the Consumer Price Index (CPI), which tracks the annual change in cost for a fixed basket of goods and services representing average consumer spending.
Step-by-step explanation:
Inflation can be measured by several methods, but the most accurate and common method is the percentage change in the Consumer Price Index (CPI). The CPI reflects the annual percentage change in the cost to the average consumer of acquiring a fixed basket of goods and services, which can be adjusted annually or at specific intervals. This measure includes various goods and services to represent the typical consumer's spending habits. While there are challenges like substitution bias and quality/new goods bias associated with a fixed basket approach, the CPI is nonetheless widely used to gauge inflation.
Other measures like the Producer Price Index, GDP deflator, and Core Inflation Index also exist, but when it comes to the cost of living for average consumers, the CPI is the standard indicator. It is important to note that changes in the CPI represent changes in the cost of living, providing a reflective measure for a consumer's purchasing power and economic policy assessments.