Importance: ***
Definition: The consumer price index(CPI) is considered the most important measure of inflation. It comparesprices for a fixed-list of goods and services to a base period. Currently,the base period, which equals 100, is the average prices in the 1982-1984period.
Related Indicators:Producer Price Index, Price Deflatorsof GDP.
Source: Bureau of Labor Statisticsof the U.S. Department of Labor
Frequency: Monthly
Availability: Two to three weeksfollowing the reported month
Direction: Procyclical as inflationtends to go up in booms and fall during recessions.
Timing: Coincident indicator
Volatility: Low
Likely Impact on Financial Markets:
- Interest Rates: Larger-than-expectedquarterly increase in price inflaton or increasing trend is consideredinflationary; this will cause bond prices to drop and yields and interestrates to rise.
- Stock Prices: Higher than expectedprice inflation is bearish on the stock market as higher inflation willlead to higher interest rates.
- Exchange Rates: High inflationhas an uncertain effect. It would lead to a depreciation as higher pricesmean lower competitiveness. Conversely, higher inflation causes higherinterest rates and a tighter monetary policy that leads to an appreciation.
Analysis of the Indicator:
The CPI is a fixed-basket price index as it represents the price ofa constant quantities basket of goods and services purchased by the averageconsumer. The CPI categories and weighsin the basket are: Housing42%; Food 18%;Transportation 17%; Medical Care 6%; Apparel 6%; Entertainment4%; Other 7%. High CPI inflation is bad news for the bond market. A weak% rate of change of the price deflators is received favorably bybond investors; a strong inflation report causes concern the Fed mightneed to intervene and raise interest rates--a negative for the fixed incomemarket. Conversely, a lower-than-expected figure is bullish for the market,causing the bond to gain and yields to fall. Unlike other measures of inflation,which only cover domestically-produced goods, the CPI covers imported goods,which are becoming increasingly important to the U. S. economy. The onedrawback to the CPI is its small sample size. Analysts focus on the "core"CPI, which excludes the volatile food and energy sectors. The core indexis considered a more accurate measure of the underlying rate of inflation.Overall, consumer prices rose just 1.7 percent during 1997, the lowestincrease in 11 years. By comparison, prices rose 3.3 percent during 1996.
WEB Links
A Graph of the latest CPI data from TheEconomic Statistics Briefing Room of the White House.
The latestCPI report from the BLS.
See the DismalScientist Homepage for charts, tables and analysis of the latest CPIreport.
