The Consumer Price Index (CPI) is used to track the price of a basket of assets to get insights into market segments.
Indexes include the S&P 500, the NASDAQ Composite, and the DJIA. All of these indexes measure the performance of the major stocks. There is no single CPI. Instead, the term refers to any type of index that tracks the prices of consumers, services, and home goods.
What is a CPI?
The Consumer Price Index (CPI) is the most widely used economic indicator for tracking inflation.
It consists of a basket of goods and services, with the basket price calculated as an average of the constituent items’ retail prices. CPI is released every month. However, quarterly and annual reports are also common. These frequent reports allow us to track changes in the prices of individual products as well as the entire basket over time. Moreover, the inflation rate refers to the rate at which the basket price varies gradually.
The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of assets, reflective of total user expenditure. The CPI reports differ from the Producer Price Index (PPI) in a survey methodology, price sample, and index weights. The PPI measures changes in prices received by U.S. producers of these commodities.
U.S. Bureau of Labor Statistics (BLS)
The BLS collects about 94,000 monthly prices from 23,000 retail and service companies. The more broad-based and often cited of the two CPI indexes produces from the data covers 93% of the U.S. population.
Income taxes and the asset prices such as stocks, bonds, and life insurance policies are not included in the CPI. Shelter prices, which account for one-third of the overall CPI, are based on a survey of prices for 43,000 housing units. This survey determines the rise in rental costs and the equivalent for owners.
Every month, the BLS releases two CPI indexes.
- CPI for All Urban Consumers (CPI-U) covers 93% of the U.S. population who don’t live in remote rural areas. It excludes spending by those who live on farms, institutions, or military posts.
- CPI for Urban Wage Earners and Clerical Workers (CPI-W) includes 29% who live in places where the primary source of income is office work or hourly wage jobs. The CPI-W adjusts Social Security payments, federal benefits, and pensions for cost-of-living changes.
Consumer Price Index and Forex
The CPI significantly impacts central bank monetary policy decisions as a measure of inflation levels in consumer goods. Some of these decisions, like interest rate decisions, directly affect the currency stability in the forex markets.
Inflation and interest rates are strongly intertwined. When inflation rates exceed or fall below target levels, banks must decide how to alter interest rates to stabilize the economy. If inflation falls too far below the target level, the central bank may decrease interest rates to boost economic activity. On the other hand, inflation levels that are too high above the target levels can lead the central bank to raise interest rates, reducing consumers’ purchasing power.
When a currency’s interest rate rises due to increasing inflation, demand for that currency rises, and the currency gets stronger. Similarly, as the interest rates drop, so does the demand for that currency, and its value drops.
CPI Forex Data Impact On USD
The dollar is not just one of the most popular forex currency pairings but also the most traded currency. Because USD is the most traded currency, anything that impacts it has an impact on other currency pairs.
CPI, which has a direct link with USD, significantly impacts its value. When the CPI falls, the value of the dollar falls as well. When the CPI rises, the value of the dollar rises as well. This is because rising inflation drives the Federal Reserve to raise interest rates, which in turn increases demand for USD.
The CPI figures are divided into two categories by the BLS.
- The CPI
- The Core CPI
The difference between the two is that the CPI includes all consumer goods and services, whereas the Core CPI eliminates energy and food prices due to their high price volatility.
- Consumer Price Index (CPI) tracks the price of a basket of services and goods.
- CPI is mainly used as an economic indicator for tracking inflation.
- The Bureau of Labor Statistics (BLS) calculates the average CPI for a basket of assets.
- BLS releases two CPI indexes monthly: The CPI-U and The CPI-W.
- CPI has a significant impact on currency prices, especially on the USD.