Understanding CPI and its Impact on Inflation and the Economy

The Consumer Price Index (CPI) y/y shows the changes in the average prices of the consumer basket of goods and services in the selected month compared to the same month of the previous year. The index shows how prices change from the consumer’s point of view. In other words, it allows to estimate changes in the cost of living.

The goods and services included in the CPI calculation basket are divided into eight main groups: food and beverages, housing, clothing, transportation, medical care, entertainment, education and communications, and other goods and services. These eight groups, in turn, are divided into more than 200 categories with about 80,000 titles. The index calculation does not include income taxes and investment items (stocks, bonds, insurance policies). Unlike the PPI, the prices of imported goods and the prices of indirect production are included in the calculation.

Prices of goods and services, on which the index is calculated, are collected through a monthly survey of about 23,000 commercial and service companies. The sample is reviewed from time to time. Thousands of families across the country were also interviewed. The weights of calculation items are regularly reviewed. The index is calculated in comparison with standard prices as of 1982.

The CPI calculation takes into account the spending of urban populations, such as specialists, self-employed citizens, the unemployed, officials and retirees. Farmers, rural residents, military personnel and individuals in prisons and psychiatric hospitals are not included in the calculation.

The consumer price index is often used to assess inflation. CPI growth indicates an increase in inflation. The indicator is taken into account when adjusting wages and social payments. The consumer price index is also used to adjust the structure of income tax and in calculating real GDP. CPI growth is positive for dollar prices.

Factors Leading to High Inflation in the United States Currently

Several factors contribute to the current higher-than-average inflation rate in the United States. Here are some key factors:

Supply chain disruptions: The COVID-19 pandemic has disrupted global supply chains, leading to shortages of raw materials, components and finished goods. These supply chain disruptions have led to higher production costs and contributed to higher prices.

Increased demand: As the global economy recovers from the pandemic, there has been an increase in consumer demand for goods and services. This increased demand, coupled with supply constraints, has led to price pressures.

Fiscal and monetary stimulus: To mitigate the economic impact of the pandemic, governments and central banks have implemented significant fiscal and monetary stimulus measures. These measures, such as government spending and low interest rates, have injected liquidity into the economy, which could lead to increased inflationary pressures.

Higher energy and commodity prices: Prices of energy and commodities, such as oil and metals, have seen significant increases in recent months. High energy costs can directly affect transportation and production costs, which can lead to higher prices in various sectors.

Wage pressures: There has been a growing demand for labor in some industries, creating wage pressures. Higher wages can contribute to higher production costs, which may be passed on to consumers in the form of higher prices.

It is important to note that the factors that lead to inflation are complex and interrelated, and their impact can vary over time. Central banks and policymakers closely monitor these factors to assess the inflationary environment and make informed monetary policy decisions.

CPI stabilizes and core inflation rises in May

The Labor Department said on Wednesday that the consumer price index remained flat in May, while the core index excluding food and energy rose 0.2%.

Why it matters: For the second month in a row, inflation has slowed — welcome news for U.S. households and policymakers after a heated start through 2024.

The latest CPI figures show that overall prices did not rise at all – compared to an increase of 0.3% in April, while the core measure rose by the same amount.

Over the past 12 months ending in May, the index rose 3.3%, compared to 3.4% in April. The core index has risen 3.4% over the past twelve months, down from 3.6% in the previous month.

Details: Lower gasoline prices helped the overall index fall. The energy index fell 2% in May, while the gasoline index fell 3.6%.

Grocery store prices rose 0.1% after remaining unchanged in April, while out-of-home food prices — the category that tracks takeout — rose 0.4%, more than the previous month. Shelter prices continued to rise at a rapid pace, rising 0.4% for the fourth consecutive month. Among the categories that saw a complete drop in prices in May were airfares, new cars and clothing.

What to watch: The Fed has postponed the timeline for potential rate cuts this year after signs emerged that inflation looks harder to eliminate than initially thought and the overall economy remains strong. The Fed is due to release its latest rate decision on Wednesday afternoon.

While policymakers are sure to keep interest rates unchanged, there will be a lot of attention to the Fed’s updated forecasts on inflation, the labor market and the interest rate trajectory that are due to be released alongside the decision.

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