Understanding the CPI

If you want to know whether goods in the US are getting more or less expensive, what can you do? The CPI can help.

CPI, the consumer price index, measures the change in the average price level of a fixed basket of consumer goods and services.

When the CPI is rising, consumer prices are also increasing. When it falls, it means consumer prices are generally falling.

CPI is one of the world's most closely-watched economic indicators because changes in the CPI are used to determine the inflation rate.

A higher CPI indicates higher inflation, while a falling CPI indicates lower inflation or deflation.

In the US, the Federal Open Market Committee (FOMC) generally aims to maintain inflation rates at around 2%.

The committee uses the CPI to determine if economic policies need to be modified to control inflation.

If the number rises above the 2% level and remains high for a long time, the FOMC can raise interest rates to rein in rising prices.

On the other hand, an extended period of low or negative inflation may lead to the FOMC cutting interest rates to stimulate the economy.

Changes in the inflation rate and the expectations toward it will have a ripple effect across stocks, bonds, commodities, and portfolios.

This is why traders care so much about the monthly CPI. Generally, there are two ways to read the data.

One is to compare the released number with the forecast and the previous release. The other is to compare it with the central bank's target.

Let's assume that a monthly CPI report in the US is coming soon. The previous result was 8%, and analysts anticipate it will decline to 7.5%.

But the actual number turns out to be 7%, which beats the market forecast.

In this case, raising interest rates would be less likely, and more traders would likely long the NASDAQ 100 index, but the USD might be weaker.

The US Bureau of Labor Statistics reports the CPI at 8:30 AM Eastern Time once per month. You can find the schedule of prior and future releases on the BLS website.

You also will find two CPI numbers in the monthly report——the CPI-U and the CPI-W. Just remember that the CPI-U is the most widely reported in the financial markets because it represents 93% of the US population not living in remote rural areas.