Consumer Price Index

The Consumer Price Index is better known to most Americans as the rate of inflation. It is one of the most closely watched economic indicators because of the devastating affect inflation can have on the economy.

The Bureau of Labor Statistics releases the CPI around the middle of each month for the previous month. The CPI measures a “basket” of goods and services and compares the prices month to month.

This basket contains hundreds of different types of goods and services ranging from the inexpensive to very expensive. They come from stores both large and small and from big and small communities.

There are actually two numbers reported:

• CPI
• Core CPI

The CPI includes the whole basket of goods and services, while the Core CPI excludes more volatile items like food and energy, which may jump in price from month to month. Most market watchers are more concerned with the Core number.

The CPI is important because a rise, especially in the Core number might push the Fed to raise interest rates in an effort to prevent inflation from getting out of hand.

It is also important because a number of benefits such as Social Security and some contracts have a “cost of living” provision tied to the CPI.

The Bureau of Labor Statistics reports the CPI as a percentage, typically a tenth of a percent in recent year, for the month. For example, a CPI of 0.2% would equal an annual CPI of 2.4% (0.2% x 12 = 2.4%).

Conclusion

The CPI is an important indicator for investors. If it comes in way off what the market expects, you may see a strong reaction.