Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a monthly indicator that tracks the changes in prices that consumers pay for various goods and services. It serves as an index measuring the price fluctuations of a representative assortment of items, including food, energy, housing, clothing, transportation, medical care, entertainment, and education.

What is CPI? The CPI is the tool utilized by economists to monitor price changes in a typical "basket" of goods and services that consumers buy. The Bureau of Labor Statistics (BLS) calculates the CPI by averaging the weighted cost of a basket of goods for a specific month and dividing it by the weighted cost of the same basket from the previous month. This percentage is then multiplied by 100 to produce the index number.

Why is CPI important? The CPI is a key measure of inflation, reflecting the sustained increase in prices that consumers face in their everyday expenses. The rise in the CPI is commonly perceived as the "inflation rate." Retailers use it to forecast future price hikes, employers rely on it for salary calculations, and the government uses it to determine cost-of-living adjustments for Social Security. Signs of inflation prompt the central bank to raise interest rates, with CPI being the most widely recognized inflation indicator. An increasing CPI provides the central bank, such as the Fed, with the necessary data to support interest rate hikes, which can be beneficial for the country's currency.

What goes into the Consumer Price Index? The CPI measures the changes over time in the prices consumers pay for a market basket of goods and services. This basket includes essentials like food, clothing, shelter, and used cars. Items that consumers spend more on, like food, are weighted more heavily in the index than items with lower spending, such as toothpaste and movie tickets. Investment items like stocks, bonds, real estate, and life insurance are excluded, as they pertain to savings rather than everyday consumption.

Each month, economic assistants from the Bureau of Labor Statistics (BLS) visit or contact thousands of retail stores, service providers, rental units, and medical offices across the United States to gather price information on thousands of items for the CPI. They record prices for approximately 80,000 items each month, representing a scientifically selected sample of consumer purchases. During each visit or call, the economic assistant collects price data on a specific item defined in a prior visit. If the item is available, its price is recorded; if not, a new item is selected or quality changes are noted.

This information is sent to the BLS national office, where commodity specialists review the data for accuracy and consistency, making necessary corrections or adjustments. These adjustments can range from changes in packaging size to more complex statistical analyses of an item's features or quality.

Source: Bureau of Labor Statistics, Department of Labor

Availability: The CPI is released at 8:30 am EST during the second or third week following the month being reported.

Frequency: Monthly.

Revisions: No monthly revisions.

Additions: The Consumer Price Index, commonly referred to as CPI, is also known as the "Retail Price Index" and is often viewed as the most widely used and accurate measure of inflation. It is regarded as an indicator of the effectiveness of current government policies. Essentially, the CPI represents a "basket" of various consumer goods and services purchased by wage earners in specific urban areas, tracked month to month. The CPI is a fixed quantity price index and a form of cost of living index, making it a valuable tool in financial circles for indicating inflation trends.

When inflation rises, purchasing power declines, meaning each dollar earned buys a smaller portion of goods or services. The Federal Reserve typically combats rising inflation by increasing short-term interest rates, a move often viewed unfavorably by investors due to higher borrowing costs. Attention should be paid to the "core rate," which excludes volatile food and energy prices for a clearer measurement of general price trends. Ideally, financial markets aim for the CPI to rise at an annual rate of 1-2%, as any increase beyond this level signals potential inflation concerns.

The CPI can be significantly affected by fluctuations in food and energy prices, making it crucial to examine the CPI excluding these items, known as the "core" CPI. Within the core CPI, closely monitored components include apparel, tobacco, airfares, and new cars. Economists often view the year-over-year change in core CPI as the best indicator of underlying inflation rates.

How to trade the CPI report: When the CPI report is released, it is vital to consider current market conditions and the broader economic context. As a key inflation indicator, central banks like the Federal Reserve closely observe it for monetary policy decisions. Here are some factors to consider when interpreting the CPI report:

• Market expectations: Analysts and economists typically provide forecasts before the report's release. Significant deviations from these expectations can trigger market reactions, affecting stock prices, bond yields, and currency exchange rates.
• Inflation trends: Compare current CPI data with previous months or years to identify prevailing inflation trends. A consistent rise in CPI may indicate increasing inflationary pressures, while a decline could suggest weakening inflation or deflation.
• Core CPI: The core CPI excludes volatile food and energy prices, focusing on other goods and services. It is considered a more stable indicator of underlying inflation trends. Comparing core CPI with overall CPI can help identify specific factors driving headline inflation.
• Central bank’s target: Consider the Federal Reserve's inflation target, currently set at 2% for the U.S. A CPI report showing inflation significantly above or below this target may influence the central bank's monetary policy decisions.
• Economic factors: Analyze the CPI report alongside other economic indicators, such as unemployment, GDP growth, and fiscal policies, to better understand inflation drivers and gauge overall economic health.
• Market reaction: Observe how financial markets respond to the CPI report, including movements in stock prices, bond yields, and currency exchange rates, to gain insight into investor interpretations and potential impacts on future monetary policy.

In summary, interpreting the U.S. CPI report involves considering market expectations, inflation trends, core CPI, central bank targets, and the broader economic context. Understanding these factors will aid in anticipating potential changes in monetary policy.