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Consumer Price Index (CPI)

The Consumer Price Index (CPI) is an economic indicator designed to measure the inflationary and deflationary pressures present in a country or region. By tracking the pricing variations of a select group of goods and services, the relative purchasing power of a domestic currency may be quantified.

CPI is technically classified as a lagging indicator, meaning that it is a measurement that reflects the presence of an evident economic trend. It is used by central banks, traders and investors to identify any changes in the cost of living for a given geographic locale. CPI is a common element of fundamental analysis relative to the trade of currencies, futures and equities.

CPI Derivation

CPI is calculated by averaging the price changes relative to a select group of items frequently purchased by households. The exact collection of goods and services varies by region or issuer of the study. It is important to remember that there is no international standard for CPI derivation; what constitutes CPI for one region is not necessarily exact to another.

The U.S. CPI is among the most scrutinised economic reports in the world. Released to the public by the U.S. Bureau of Labor Statistics (BLS), it is officially defined as being the "average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."[1]

U.S. CPI is derived according to the following parameters and methodology[2]:

  • Regions: Individual price indices are calculated for various locales in the four official U.S. Census regions, which comprises 23 individual areas.
  • Major Groups: The primary groups of consumer expenditures targeted include food/beverage, housing, clothing, transportation, medical care, communications, leisure, and other goods/services deemed relevant by the BLS.
  • Pricing Data: Actual prices for goods/services are gathered from 75 cities, 23,000 retailers and 43,000 landlords or tenants. The extensive sample set provides an accurate cross section of domestic consumption, exclusive of foreign expenditure and capital investment.
  • Averages: Upon each regional and sectoral weighted index being computed, the aggregate current CPI statistic may then be derived. It is calculated as the average cost of an entire basket of goods and services relative to that of a base year.
  • Adjustment: CPI is adjusted seasonally and categorically as deemed necessary by the BLS.

CPI is released monthly by the BLS and is compared on a month-over-month and year-over-year basis. The indicator is referenced in the crafting of monetary policy decisions made by the United States Federal Reserve (FED).

In addition, CPI is employed by the U.S. Treasury to mitigate unwarranted tax increases due to inflation. It is also used as a way of adjusting government compensation schedules such as Social Security, military and Federal Civil Service pension payments.[3]

Traders and investors view the number as a key economic indicator. Typically, the release of CPI injects short-term volatility in the financial markets in relation to projected values and consensus expectations.

Global CPI Statistics

CPI is a powerful tool for financial market participants, governments and policy-making bodies interested in monitoring ongoing economic conditions. U.S. CPI is only one version of the statistic. Mature and developing nations around the globe utilise the study's framework to measure the prevailing inflationary/deflationary pressures facing their domestic economies.

The following is a list of the world's major currencies and the organisations in charge of providing the associated CPI measures to the public:

Country/Region Currency Issuer
United States USD Bureau of Labor Statistics
United Kingdom GBP National Statistics
European Union EUR Eurostat
Germany EUR Statistisches Bundesamt Deutschland
Canada CAD Statistics Canada
Switzerland CHF Swiss Federal Statistical Office
Japan JPY Statistics Japan
China CNY National Bureau Of Statistics China
Australia AUS Australian Bureau of Statistics
New Zealand NZD Statistics New Zealand

Each of these countries and authorities release their respective CPI on a monthly basis except for Australia, which posts the figure once per quarter.[4] In addition, local reports vary in methodology with respect to the select goods/services monitored, weights and regional accommodations. Regardless of exactly how the metric is calculated, the goal of each is to measure the impact on consumers by a rise or fall in the purchasing power of a domestic currency.

On a global scale, international monetary authorities such as the World Bank Group (WBG) use CPI to identify the prevailing state of inflation/deflation facing the entirety of the world economy. Since 1960, the WBG has calculated and recorded statistics for member nations as well as an aggregate figure.[5] The studies factor into lending decisions made by the WBG and International Monetary Fund.

Summary

CPI is a widely respected economic metric and staple of global finance. It represents the pressures placed on consumers by variations in the purchasing power of a domestic currency. In cases of widespread inflation or deflation, CPI values are viewed as an important factor in the crafting of monetary policy enacted by central banking authorities. The statistic is also valued by market participants aspiring to build strong strategies for active trade and investment.