Consumer Price Index (CPI)

Importance: ***

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 period.

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Related Indicators: Producer Price Index, Price Deflators of GDP.

Source: Bureau of Labor Statistics of the U.S. Department of Labor

Frequency:  Monthly

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

Volatility: Low

Likely Impact on Financial Markets:

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.

WEB Links

A Graph of the latest CPI data from The Economic Statistics Briefing Room of the White House.

The latest CPI report from the BLS.

See the Dismal Scientist Homepage for charts, tables and analysis of the latest CPI report.