The Consumer Price Index (CPI) Is a Friend to Investors

The Consumer Price Index (CPI) Is a Friend to Investors

Prices for goods and services fluctuate over time, but when they begin to move faster in one direction or the other, it could be an indication of an inflationary or deflationary trend that could be enough to shock the economy.

An essential indicator of American prices, the Consumer Price Index (CPI), gives a monthly indication of their general trajectory. Though the exact date changes, the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor distributes the CPI data for each month during the second week of the following month. (The next publication date is noted in each report, and a release schedule is available on the BLS website.

Inflation is an important consideration in economic decision-making, including that of the Federal Reserve’s interest rate policy, Wall Street trading, and the strategies of large banks and firms, hence the CPI report is closely observed. An in-depth analysis of consumer price trends might also be beneficial for individual investors.

Construction of the CPI

The top figure in the CPI report represents the change in the index for all urban consumers, which includes 93% of the country’s citizens. The CPI-U is another name for the index.

In order to calculate the cost of living adjustment for recipients of Social Security and other federal benefits, a subset of the CPI-W index, which includes data on 29% of the population of the United States, records price increases for urban wage earners and clerical workers.

A chained CPI index (C-CPI-U), which aims to account for the effect of product category substitution when customers choose alternatives to those with the quickest price increases, is also included.

The CPI is based on prices for around 80,000 commodities and services that are gathered each month from 23,000 retail establishments, service providers, and 8,000 rental housing units in 75 major regions. The BLS divides the pricing data into 211 different product and service categories, and then modifies the relative weight of each category in the index every two years in accordance with current consumer spending trends.

Nearly 94,000 prices are collected monthly for the CPI’s commodities and services survey, about two-thirds of which are gathered by surveyors during visits to stores and other businesses. Gasoline and other motor fuel prices, in particular, are obtained from external data providers. Housing estimates housing rentals as well as the value of shelter for homeowners using rental price data from a separate survey. As of March 2022, housing accounted for more than 42% of the overall CPI.

Some Applications of CPI

More than 70 million beneficiaries of Social Security and Supplemental Security Income, as well as more than 41 million users of federal assistance through the Supplemental Nutrition Assistance Program, use the CPI-W to index cost-of-living adjustments (also known as SNAP, or food stamps).

Millions of military and government retirees receive benefits based on the index, and employees whose salaries are affected by cost-of-living adjustments under collective bargaining agreements also receive pay increases. Additionally, the CPI-W is used to establish the price of school lunches and to modify income tax rates in order to prevent bracket creep.

Retail sales, hourly and weekly wages, as well as the national income and product accounts are just a few of the data series that are adjusted for the effects of inflation using CPI data.

Using the CPI as a Hedge Against Inflation

The price of financial assets, including stocks and bonds, can also be affected by excessive inflation, which is risky for economic growth.
The purchase of an inflation swap, a derivatives contract that provides payments based on increases in the CPI, is another option available to sophisticated investors looking to benefit from inflation or just hedge it. The cost of such contracts can provide information about the general expectations for inflation.

Conclusion

The CPI is the most well-known inflation indicator and one of the most significant and watched economic indicators. Wages, retirement benefits, tax brackets, and other significant economic indicators are all adjusted based on the CPI. Investors can better understand and manage the risks associated with inflation and deflation by using inflation-protected securities and derivatives contracts based on the CPI.

close

We don’t spam! Read our privacy policy for more info.

Related Articles

Microsoft investigates Outlook outage as users face issues

02/06/2023

Microsoft investigates Outlook outage as users face issues In this article: MSFT...

Toshiba’s Bidder Set to Win Commitments for $10.6 Billion Loan

02/06/2023

Toshiba’s Bidder Set to Win Commitments for $10.6 Billion Loan In this...

European Gas Slips on Ample Stockpiles, Milder Weather Outlook

02/06/2023

European Gas Slips on Ample Stockpiles, Milder Weather Outlook In this article:...

Australia’s Venture Capital Deals Slide 30% From Record Year

02/06/2023

Australia’s Venture Capital Deals Slide 30% From Record Year Australia’s Venture Capital...

Baidu Surges After Prepping ChatGPT-Style ‘Ernie’ Bot for March

02/06/2023

Baidu Surges After Prepping ChatGPT-Style ‘Ernie’ Bot for March In this article:...

Vanguard Eyes Bigger Slice of Australia’s $2.3 Trillion Pensions

02/06/2023

Vanguard Eyes Bigger Slice of Australia’s $2.3 Trillion Pensions In this article:...