Definition: The consumer price index
(CPI) is considered the most important measure of inflation. It compares
prices 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 1982-1984
Producer Price Index, Price Deflators
Source: Bureau of Labor Statistics
of the U.S. Department of Labor
Availability: Two to three weeks
following the reported month
Direction: Procyclical as inflation
tends to go up in booms and fall during recessions.
Timing: Coincident indicator
Likely Impact on Financial Markets:
Interest Rates: Larger-than-expected
quarterly increase in price inflaton or increasing trend is considered
inflationary; this will cause bond prices to drop and yields and interest
rates to rise.
Stock Prices: Higher than expected
price inflation is bearish on the stock market as higher inflation will
lead to higher interest rates.
Exchange Rates: High inflation
has an uncertain effect. It would lead to a depreciation as higher prices
mean lower competitiveness. Conversely, higher inflation causes higher
interest rates and a tighter monetary policy that leads to an appreciation.
Ability to affect markets: High if
there are large unexpected changes in inflation rates.
Analysis of the Indicator:
The CPI is a fixed-basket price index as it represents the price of
a constant quantities basket of goods and services purchased by the average
consumer. The CPI categories and weighsin the basket are: Housing
42%; Food 18%;Transportation 17%; Medical Care 6%; Apparel 6%; Entertainment
4%; Other 7%. High CPI inflation is bad news for the bond market. A weak
% rate of change of the price deflators is received favorably by
bond investors; a strong inflation report causes concern the Fed might
need to intervene and raise interest rates--a negative for the fixed income
market. 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 one
drawback to the CPI is its small sample size. Analysts focus on the "core"
CPI, which excludes the volatile food and energy sectors. The core index
is considered a more accurate measure of the underlying rate of inflation.
Overall, consumer prices rose just 1.7 percent during 1997, the lowest
increase in 11 years. By comparison, prices rose 3.3 percent during 1996.
A Graph of the latest CPI data from The
Economic Statistics Briefing Room of the White House.
CPI report from the BLS.
See the Dismal
Scientist Homepage for charts, tables and analysis of the latest CPI