CPI: All You Need to Know

Although inflation seems to be easing a bit, it is hard to escape the fact that it is still conquering the economic field. And while maybe in the past, the rise in the prices of goods and services was something we seldom noticed, in this dire economy, it is hard to let these changes slip. Therefore, knowing the shifts in the prices of the everyday goods we pay for is likely a good step towards understanding inflation better. 

Accordingly, in this article, we’ll explore the Consumer Price Index (CPI) which gauges the changes in the prices of goods and services, and look at yesterday’s CPI figures.

What Is the CPI Exactly?

Households buy everyday goods and services like food, clothing, transport, and leisure spending. These spending habits are tracked by the Consumer Price Index (CPI) of a certain country. By calculating the CPI, economists can gauge how the rises and falls of prices influence the cost of living and can utilize this information to determine inflation rates. In short, the CPI is the main economic indicator that is used to track inflation rates and the cost of living. 

How Is the CPI Calculated and What Does It Measure? 

The CPI measures a basket of goods and services that can be segmented into 8 major groups; foods and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. The US Bureau of Labor and Statistics (BLS) records around 80,000 items gathered from retailers, rental spaces, and service providers, and releases CPI results monthly. The CPI is the equivalent of the cost of the market basket in a given year divided by the cost of the market basket in the base year multiplied by 100. 

Why Is the CPI Important?

The CPI is important for a myriad of reasons. First and foremost, it is one of the most significant and commonly used tools to measure inflation and deflation which are markers of an economy’s health. Price increases that affect your purchasing power are known as inflation and the rising cost of goods and services results in declining your money’s purchasing power since you’d have to pay more to purchase a certain item. 

This is where the CPI comes into play. This index can point out inflation and how far it’s going, and determine how well or badly current economic policies are playing out.  This is why governments and central banks like the Federal Reserve and the European Central Bank (ECB) leverage CPI in their monetary decision-making.  For example, when determining how to combat inflation, like in the recent economic crisis around the world, central banks tend to refer to the CPI when deciding whether or not to raise interest rates. 

But that’s not all, CPI is significant because it is tied to the cost of living index, which measures the average expenses an average individual is expected to pay on things like shelter, food, and energy (among other services). And since the cost of living index factors into Social Security benefits and tax-advantaged retirements among other things, the CPI also becomes a key player in social securities. In addition, the CPI can also be used by employers and business owners. The former can use the CPI  to determine their employees’ wages while the latter can utilize it to determine the prices of their goods and services. 

July’s CPI Results: Is inflation easing?

Whereas June’s CPI results were less-than-optimistic as notably higher prices were noticed and inflation rose to 9.1%, the highest rate in almost 41 years, July’s CPI figures seem much kinder to the average consumer.  Yesterday’s CPI figures may be the light at the end of the tunnel for many investors and consumers alike. This is because while economists forecasted an 8.7 increase in CPI rate in the US, yesterday’s data actually showed lower-than-estimated figures. 

Accordingly, the latest CPI results showed an 8.5 rise in consumer prices. This data comes with a possibly optimistic revelation; on a month-on-month basis, inflation did not hike compared to June. In the meanwhile, these figures may perhaps alleviate the concerns regarding a possibly perpetual inflationary spiral and an accompanying recession which were especially prominent after June’s CPI release. (Source:CNBC)

American Indices Rise After Inflation Eases

With the economy seeming to cool off from inflationary fires, key American Indices are rising. Following yesterday’s CPI release, the tech-heavy Nasdaq (US-TECH 100), according to some, may have been able to end its longest bear territory since the financial crisis. Yesterday, this index hiked more than 20% from June’s lows, as it rose by almost 2.9%. Similarly, the S&P 500 (USA 500), and the Dow Jones (USA 30) rose 2.13% and 1.63% respectively hence rallying and recouping many of the losses experienced over the past trading sessions. (Source:The New York Times)

What’s Next?

The past few months have been irrefutably hard enough on consumers who were already grappling with high inflation, the effects of the ongoing war in Ukraine, and the aftermath of the pandemic. While in the meantime, the situation may seem a bit more hopeful to some, investors might have to wait and see how the central banks will use the latest CPI data in their decision-making. Only time will tell what the future holds, as the market is volatile and much of what lies ahead is still uncertain.