Consumer Price Index (CPI). What is the CPI? | by André Cardoso | Coinmonks | May, 2023

The CPI, or Consumer Price Index, is a measure of the average change in prices of goods and services consumed by people over time. It comes in handy as a measure of the economy’s inflation or deflation. The CPI is calculated via a comparison of the prices of a set of products and services in the given time frame to the prices of that exact basket in previous periods of time. This makes it possible for economists to monitor changes in the expenses of daily life and alter economic policies effectively.

How is the CPI used?

A wide range of organizations, including lawmakers, business organizations, and other individuals, use the Consumer Price Index. Policymakers can use the CPI to evaluate if inflation is increasing too rapidly and then adjust interest rates or government expenditures accordingly. In order to keep up with developments in the cost of being alive, organizations may utilize the Consumer Prices Index (CPI) to alter their rates or salaries. Customers may use the CPI to understand how their purchasing power has changed over time and to make sound financial decisions. Additionally, the CPI gets used frequently for finance research and forecasting.

How does the CPI impact the markets?

The CPI has an opportunity to have an enormous impact on marketplaces, specifically the stock and bond markets. When the CPI demonstrates that prices are rising and continue to rise at an excessive pace, investors could grow concerned about the likely outcome of higher interest rates, which can cause the value of shares to fall. If, on the other hand, the CPI shows that wage growth is under control, speculators may gain optimism regarding the worldwide economy and become more ready to put their money into stocks and bonds. Overall, the CPI is a useful tool for comprehending the economy as well as making sound financial decisions.

The Core CPI is an inflation measure that excludes energy and food costs because they can be more volatile and vulnerable to shifts in the seasons. This offers a better understanding of the economy and its fundamental price patterns. The fundamental CPI is frequently referred to as an influential indication of rising costs by policymakers as well as investors.

How is the Core CPI used?

Policymakers use the Core CPI to make financial policy choices, for example, higher interest rates. Investors use it to figure out the health of the country’s economy and make choices concerning investments. Additionally, because it provides a more accurate indicator of inflation than the entire Consumer Price Index, the fundamental CPI is commonly used in pay negotiations as well as contractual agreements. As a whole, the Core Index is a crucial economic indicator that helps with decisions in a variety of sectors.

How does the Core CPI impact the markets?

The release of Core CPI statistics has the opportunity to have significant impacts on the economy. If core inflation increases more than expected, it could suggest that inflationary pressures are rising in the economy, which could translate to a higher rate of interest and a drop in the value of shares. If the underlying CPI is lower than projected, it may imply that wage growth is not a problem, bringing lower rates of return and a boost to the price of shares. As a result, investors keep a careful eye on the core CPI statistics and change their portfolios appropriately.

The assets most influenced usually include the US dollar (USD), as CPI is a measure of inflation in the US and affects the monetary policy of the Federal Reserve. When the CPI is higher than expected, this can lead to upward pressure on the USD, while a CPI below expectations can put downward pressure on the USD.

Other assets that may be affected include US Treasury bonds, American company stocks, and commodities such as gold and oil.

In the forex market, the most influenced pairs may include EUR/USD, GBP/USD, and USD/JPY, as they are the most traded pairs with the US dollar and are therefore more sensitive to US economic news.

Safe Trades,
André Cardoso

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