If the CPI number is 140, it means that inflation is 40% higher than the 1984 figure. Nowadays, the CPI acts as a leading indicator of inflation and helps the national central bank adjust its monetary policy according to its inflation targets. A constant level of inflation (i.e. 2%) is considered healthy for consistent economic growth. The CPI, like any inflation indicators, is a lagging indicator meaning it reports the change in the past period. 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. For example, under normal economic conditions, an increase in the CPI would encourage the central bank to raise interest rates, which would add value to the currency and attract traders to buy more. However, if the current inflation is very high or the economy is in recession, the stagnant income level of citizens will not match the rising cost of living and ultimately lead to reduced consumer spending over time. Therefore, it can create the opposite effect and drive investors away.
How do you calculate the Consumer Price Index? The CPI measures the inflation rate of consumer prices in an economy by creating a basket of basic goods and services. Overall, the CPI baskets include 80 sub-indices in 8 categories, ranging from food and clothing to housing and transportation. Basket formation methodologies and formulas for calculating price indices can vary slightly in each country and region.
How does the CPI affect Forex?
CPI numbers can have a significant impact on the currency exchange rate. Not only the actual numbers, but even traders’ expectations of the CPI numbers can cause a great deal of volatility in the currency markets. That’s because the CPI is a measure of inflation in a country, and because inflation rates have a significant impact on a central bank’s decision-making processes. When inflation is too high, the central bank is very likely to raise interest rates, and when it is too low, it is very likely that it will cut interest rates. Of course, higher interest rates increase demand for a currency, usually causing the exchange rate to rise, while lower interest rates usually cause the currency’s exchange rate to fall.
Is a lower CPI number good for the markets, or a higher number? When the CPI rises, it means that consumer prices are also rising, and when it falls, it means that consumer prices overall are falling. In short, a higher CPI indicates higher inflation, while a lower CPI indicates lower inflation or even deflation. In this regard, CPI numbers can be very important for Forex markets in particular, since the inflation rate affects monetary policy decisions and interest rates set by central banks. Stock markets usually aren’t moved as much by CPI data, but they can be because higher interest rates can cause business activity to slow. In general, stock markets favor a low CPI that allows consumers to continue spending, and work to continue investing.
Previous CPI data from Britain
Noticeable price movements: The easing of annual inflation rates in May 2024 reflects downward contributions from eight divisions, partially offset by upward contributions from two divisions. The largest downward impacts came from food and non-alcoholic beverages, entertainment and culture, and furniture and household goods. Transportation made the largest upward contribution, partially offsetting.
Latest CPI Inflation Movements: Annual core CPI inflation was 4.2% in May 2024, the lowest rate since January 2022. It has fallen from 4.4% in April 2024 and from a recent high of 6.5% in May 2023, the highest rate Since November 1991, when it was also 6.5% in our historical built series.
Latest CPI Inflation Movements While the CPIH is our leading and most comprehensive measure of consumer price inflation, the CPI is based on a harmonized methodology developed by Eurostat that allows for international comparisons
Annual inflation rate: The most common way to measure inflation is the annual inflation rate or the inflation rate over 12 months, which compares prices of the last month with the same month last year. In any given month, the annual average is determined by the balance between upward and downward price movements of the group of goods and services included in the index.
Consumer price inflation: Consumer price inflation is rate at which the prices of goods and services purchased by households rise or fall. It is estimated using price indices. For an overview of range of indicators available and their uses, please see Consumer Price Indices, A Concise Guide: 2017 and our article Measuring Prices and Variable Costs for Consumers and Households: December 2023.
Consumer Price Index data were released from Britain and were as follows: Consumer Price Index (Y/Y): Expected: 3.1%, Previous: 3.4%, Actual: 3.2% and Consumer Price Index (M/M): Expected: 0.4%, Previous: 0.6 %, Actual: 0.6%.
