What is CPI?
CPI stands for Consumer Price Index
What is it for?
CPI examines the weighted average of prices of a bundle of consumer goods and services
It serves as an economic indicator that measures the inflation/ deflation faced by end-user & determining the purchasing power of the dollar
What is included in the bundle?
80,000 items each month including food, energy, commodities, housing, healthcare, transportation etc.
How is data collected?
Governments spend significant resources to measure expenditure information accurately through targeted surveys
When is the report published?
The CPI reports are published every month.
Are there any limitations of CPI?
- It is a conditional cost of living measure that does not take every aspect that affects living standards into account
- Unable to compare among different areas
- It may not apply to all population groups
- Sampling error- The chosen sample might not represent the entire population accurately
How to read the CPI report?
The figure is based upon the index average for the period from 1982 and 1984.
A reading of 125% means there is a rise in inflation level of 25% compared to the referenced period.
Impact of CPI reports on trading
There are usually volatile movements if the actual figures differ from the consensus on a large scale.
If actual = consensus, then the markets may not react violently as they are already expecting that, and expectations were priced into the charts
– Good for currency: Actual > Forecast
What is inflation?
When there is inflation, the purchasing power of a currency weakens. Consumers can now only purchase a portion of goods and services that they used to, with the same amount of money.
The Fed has to meet their inflation mandate, and therefore will deploy monetary policy tools to achieve that.
One of them being adjusting interest rates. Interest rates are of huge significance to the economy as it directly affects how willing people and businesses are to borrow money. It also affects how valuable one currency is relative to other currencies.