Consumer Price Index (CPI) : Role & Function

Consumer Price Index (CPI) Role & Function

The consumer index generally refers to the Consumer Price Index (Consumer Price Index), also known as the Resident Income Price Index, commonly known as CPI. It is a relative number that reflects the trend and level of price changes of daily necessities and services ordered by urban residents in a certain period. It is the result of comprehensive induction and calculation of the income price index of urban residents and the income price index of rural residents.

The important role of the consumer index

CPI price index index is very important and enlightening. Sometimes it is announced that when the indicator rises, the currency exchange rate is bullish. Sometimes it is the other way around. The consumer price index shows the purchasing power of consumers; it also reflects the economic situation. If the index falls to reflect an economic recession, it is bound to be unfavorable to the currency exchange rate; but if the consumer price index rises, it depends on the rise of the consumer price index. Bad for the country’s currency. If the impact on interest rates is considered, the impact of this indicator on foreign exchange rates is more complicated.
When a country’s consumer price index rises, it indicates that the country’s inflation rate has risen, and it also means that the purchasing power of the currency has weakened. According to the theory of purchasing power parity, the country’s currency should weaken; on the contrary. When a country’s consumer price When the index falls, it indicates that the inflation rate of the country has dropped, that is, the purchasing power of the currency has risen. According to the theory of purchasing power parity, the country’s currency should strengthen. However, since each country takes inflation control as its primary task, rising inflation also brings opportunities for interest rates to rise. Therefore, it is beneficial to the rise of the country’s currency exchange rate; if the inflation rate is controlled and falls, the interest rate will also tend to rise at the same time. In the fall, it is not conducive to the rise of the country’s currency.

Basic functions of consumer index

1. Measuring Inflation (Inflation): CPI is a key indicator value to measure inflation. Inflation is a broad and continuous increase in the level of consumption. The amount of CPI can indicate the obvious level of inflation to a certain extent;

2. Socioeconomic calculation: In socioeconomic calculation, various price indices are needed;

3. Reflect the changes in currency consumption power: currency consumption power refers to the total number of daily necessities and businesses that can be purchased by currency;

4. Reflect the impact on the basic wages of employees: the increase in the CPI represents a decrease in the basic wage, and the decrease in the CPI represents an increase in the basic wage.

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