The CPI is a macro-economic term that gets lots of coverage in financial news but whose actual meaning and definition remain elusive and cryptic for the average person. The official definition of The Consumer Price Index is “the economic measure that examines the weighted average of the varied prices in a basket of consumer goods and services, over a certain time-frame and certain branches of the economy.”
To give you an example, the CPI table structure of the goods and services indexed in the USA, still, the biggest economy in the world and, therefore, the most significant influencer, is:
• food - 14% of the total weight
• energy - 9.3%
• commodities (not including food and energy commodities) - 19.4%
• and services* (not including energy services) - 57.3%
*divided into three sub-categories: shelter, medical care services, and transportation services
The consumers should be a relevant sample that the CPI makers randomly take. In other words, they should represent the country average. The Consumer Price Index aims to show us how much prices have changed. It looks at the variation of the price of services as well as goods for a predetermined period. Analysts can use it as an economic indicator, or as a means of adjusting currency values, and a measure of inflation.
Careful calculations that consider the price changes for each item in your self-set basket of goods and services are the correct way of reaching an accurate Consumer Price Index. After averaging the differences in price together for each item in your basket, you’ll be able to get the appropriate Consumer Price Index. The inflation rate for one year is the current CPI minus the previous CPI, divided by the previous CPI, and multiplied by 100. It sounds complicated, but it’s as simple as it can get:
Let’s assume the CPI today is 175. Let’s also assume the previous CPI has been 160. Then, using the formula we get:
Therefore, inflation is 9.3%.
Mostly in the UK, the CPI is sometimes replaced by the RPI (Retail Price Index). There are some striking similarities between the two, but also quite some significant differences. While both CPI and RPI measure inflation by following a basket of common-goods and services and their price evolution, the big difference is that the RPI does not take into consideration the costs associated with homeownership, such as mortgage, rent, and council tax. Usually, the two indicators stay in close connection to one another, the only moments when we seem them diverge being in times of stress and correction on the real-estate market.
Most of the time, the statistics bureaus of the most powerful economies follow the internationally adopted CPI, as it is more accurate, less volatile, unlike the RPI.
Changes to the CPI help macro and micro-economists to adjust the living cost for people on account of the price changes for some amount of goods and services. When compared to other economic statistics, the Consumer Price Index is perhaps the quickest and useful in determining the rate of inflation and the rate of deflation. To prevent future financial crises or stagflations, the CPI is an important index to watch and monitor. No CPI is going to be precisely the same as another index since the various goods and services measured against each other but in different quantities and on different economic situations. It’s vital to ensure that the Consumer Price Index is in line with other estimates for the economy.
Who’s in charge of reporting an official Consumer Price Index?
The U.S. Bureau of Labor Statistics does so monthly. The importance of the Consumer Price Index lies in the fact that it is a statistic that helps to manage, create, and draft fiscal and economic policies based on the monthly updates. The Consumer Price Index also defines the inflation and deflation numbers on a monthly timeframe. Policymakers such as the President, Congress, and the Federal Reserve Board highlight the utility of the CPI, making it, perhaps, the most accurate forecast on how the economy is doing overall.
According to the U.S. Labor Department, the Consumer Price Index is supposed to hit and steady itself at a rate of 2%, or under each time it’s measured. Even if the CPI goes over 2%, there’s no reason to panic, at least not initially. Raising the borrowing rates to offset any troublesome inflation in the markets can also contribute to Variations in CPI values. The Consumer Price Index covers a large part of the population, including professionals, poor, unemployed, retired, and semi-employed people. The CPI affects everybody in some way, so it’s essential to understand what it is and what it means for the economy.
How to use the CPI in your day-to-day trading?
All you have to do is check out the CPI readings, and from that moment on, it’s only a matter of interpreting the actual value of CPI to the previous value and putting this into trades. Just as an example, if we’re talking about the CPI for the US Economy, the direct influence will be over the CFDs for EUR/USD, S&P500, DOW JONES, NASDAQ, or even commodities measured in USD such as OIL (WTI), GOLD, or SILVER.
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