What economic indicator is often used to gauge the effectiveness of monetary policy?

The consumer price index (CPI) is an essential economic indicator frequently used to assess the effectiveness of monetary policy. It measures the average change over time in the prices paid by consumers for a basket of goods and services. Central banks, such as the Federal Reserve in the United States, closely monitor the CPI to gauge inflation levels in the economy.

When inflation is rising above target levels, central banks may tighten monetary policy by increasing interest rates to curb spending and borrowing. Conversely, if the CPI indicates low inflation or deflation, they might lower interest rates or implement quantitative easing to stimulate economic activity. Thus, the CPI serves as a direct reflection of consumer price movements, helping policymakers to evaluate whether their actions meet desired inflation targets and maintain economic stability.

Other indicators, such as GDP growth rate, unemployment rate, and interest rate spreads, provide valuable insights into economic performance and health, but they do not directly reflect the immediate impact of monetary policy on consumer prices, which is pivotal for understanding inflation trends and guiding future policy decisions.