CPI – Consumer Price Index determines the rate of inflation (i.e. the rate of change in prices) from the perspective of consumers when they purchase goods and services. The upward trend has a positive impact on the country’s currency CAD. The Consumer Price Index is one of the indicators most monitored by currency traders and is considered a basic indicator for determining financial inflation and purchasing trends among society in Canada. The primary goal pursued by the Central Bank is to achieve price stability. Therefore, when the central bank wants to fight inflation, the bank’s reaction is to raise the interest rate to help prices fall. High interest rates attract foreign investment, thus increasing demand for the country’s currency.
When a country publishes a CPI report, the results are expressed as a percentage of change compared to the previous release. If the outcome is positive, consumer prices rise, and the inflation rate rises. In the opposite scenario, consumers would pay less, and inflation would decrease. The market’s reaction will depend on the economic conditions of the country. It is one of the best indicators for measuring inflation. The index measures the average prices of a basket containing a mixture of the prices of food commodities, homes, clothing, transportation, nature care, entertainment services, etc., so it is also called the Cost of Living Index.
Issuance date: It is prepared monthly, but is issued 15 days after the end of the month. The type of indicator is an inflation index. The source of this indicator is through the Bureau of Labor Statistics at the Ministry of Manpower. Degree of influence: Strong news capable of moving the market immediately upon its release. If the real value of the index when it is released is greater than expected
How does the CPI affect the markets?
The release of CPI data is one of the most anticipated events by traders. It is normal to see fluctuations in the charts before and after the release of the value of this indicator. However, one thing to note is that traders do not react to CPI data. Traders are reacting in anticipation of the Federal Reserve’s actions regarding the CPI report. The Federal Reserve looks at the CPI, Producer Price Index (PPI) and Personal Consumption Expenditures (PCE) price index to determine whether they should adjust current monetary policy. The Federal Reserve’s current mandate is to keep inflation at a constant 2%. Assume the price falls below or above this level. In this case, the Fed may implement either an expansionary monetary policy, lowering interest rates to stimulate the economy or a contractionary monetary policy, increasing interest rates to reduce the money supply in circulation.
How is the inflation rate calculated from the CPI report? Inflation is the rise in prices of goods and services. The rate of increase in prices is called the inflation rate. A constant inflation rate is an important economic indicator that symbolizes the economic health of a country. High inflation rates mean prices rise quickly at the expense of the purchasing power of the general public. A low or negative rate of inflation, called deflation, is also negative as the economy becomes stagnant. The Federal Reserve aims to maintain inflation at 2% in the United States. The Federal Reserve uses the Consumer Price Index published monthly by the BLS to measure inflation. Here is the formula for calculating the inflation rate in the United States: So inflation rate = (current CPI – previous CPI) x 100
How is the CPI value calculated?
Annual CPI = (Value of goods and services for the current year / Value of goods and services for the previous year) x 100 The CPI calculation is based on a wide range of data collected and monitored by the Bureau of Labor Statistics (BLS) in the United States. The BLS relies on rate collectors to collect data from thousands of business and service establishments across the country.
Prices are monitored for more than 80,000 goods and services from 23,000 retail and service establishments. In addition, more than 50,000 residential units are monitored to determine changes in rental and rental property prices. The formula for calculating the annual consumer price index depends on the value of goods and services in the current year compared to the previous year. This ratio is multiplied by 100 to obtain the percentage that reflects the change in consumer prices during the specified period.
How is the CPI market basket determined? The US Bureau of Labor Statistics (BLS) surveys consumers in private households across the country as a population reference group, collecting information on spending habits and frequently purchased items. The data collected determines the influence of item categories on the structure of the CPI.
What goods and services are covered by the Consumer Price Index? The US Bureau of Labor Statistics (BLS) has classified average American spending and consumption patterns into eight main categories. Housing, food and beverages, transportation, basic goods, health care, energy prices, education, and other expenses. The change in price over time is evaluated for each category and averaged to create consumer price index data. The Consumer Price Index covers approximately 93% of the total US population and is the main report used by the Federal Reserve.
