What Is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI), is one of the most important economic indices that measures changes in the prices of consumer goods and services used by households. This index is published monthly and is used as a measure of inflation and consumer purchasing power.
Importance of the CPI Index
The CPI index is of great importance due to its impact on consumer behavior, economic policies, and investments in financial markets. Central banks and economic organizations use the information obtained from this index to plan and implement monetary policies and to control and manage inflation.
The CPI index can easily identify existing inflation. Using this index, one can measure the amount of money a household spends on things like buying consumer goods and services such as medical care. This index is variable and this number may change every month. This index is known as one of the measures of reducing inflation, and by using it, one can identify existing inflation and provide solutions to control it.
Types of CPI Reports
Typically, there are two types of CPI reports in the foreign exchange market, and these two reports are released on a specific day and at a specific time:
CPI and Core CPI
Core CPI, like the CPI, indicates the inflation rate of a household’s basket of goods and services. However, unlike the CPI, it does not include food, energy, and fuel. (Food and energy prices account for about a quarter of the CPI report, but these prices are highly volatile.) This makes the data more realistic. For this reason, Core CPI is considered more important than CPI, and the market reacts more strongly to it.
The table below shows a subset of information regarding the release periods of the CPI for various countries.
Release periods | Data-collecting organization | Country |
Quarterly | Australian Bureau of Statistics | Australia |
Monthly | Statistics Canada | Canada |
Monthly | National Bureau of Statistics of China | China |
Twice a month | European Central Bank (ECB) | Eurozone |
Monthly , Annually | Federal Statistical Office of Germany | Germany |
Monthly | Italian National Institute of Statistics | Italy |
Monthly | Ministry of Planning and Statistics | India |
Monthly | Statistics Bureau of Japan | Japan |
Monthly | Monetary Policy Committee | Britain |
Monthly | U.S. Bureau of Labor Statistics | America |
What impact will the CPI have on the value of money?
An increase in a country’s CPI may cause some investors to worry about a decrease in the value of their money. As a result, to escape the devaluation of their money, they decide to convert cash into assets such as metals (e.g., gold and silver) or stocks. This can lead to an increase in the value of metals like gold and certain stocks, and consequently, the value of precious metals in that country may increase significantly.
Price increases can also occur for cryptocurrencies, and this is not exclusive to precious metals. If this index convinces investors that their money’s value is about to decrease, investors will decide to buy cryptocurrencies, as they believe this monetary unit will not lose value.
For instance, if traders predict that the value of the dollar and the euro will likely decrease due to an increase in the CPI in the United States and Europe, they will invest in Bitcoin or other cryptocurrencies. This decision will lead to the growth of the crypto market.
Despite these challenges, the CPI remains a vital and important tool in economic analysis, aiding in effective decision-making at various economic levels.
Various reasons highlight the greater importance of the U.S. CPI:
The Significant Role of the Dollar as a Reserve Currency:
The US dollar is the world’s reserve currency, and many international transactions are conducted in dollars. Therefore, any changes in inflation and the value of the dollar have widespread impacts on the global economy. The US CPI, as a key index of inflation in the United States, can influence the value of the dollar.
Federal Reserve Monetary Policy:
The Federal Reserve (the US central bank) uses the CPI as a primary tool for making decisions about interest rates. Changes in US interest rates can have both direct and indirect impacts on global financial markets. Therefore, the US CPI is closely monitored by investors and analysts worldwide.
Impact on Global Financial Markets:
The United States has one of the largest financial markets in the world. Changes in the US CPI can lead to fluctuations in the stock markets, bond markets, and financial assets of other countries around the world.
How can we use the US CPI in trading?
Forex Trading
Impact of CPI on the Dollar’s Value: Changes in the CPI can directly affect the value of the US dollar. An increase in the CPI can lead to an appreciation of the dollar, as interest rates are expected to rise. Conversely, a decrease in the CPI may lead to a depreciation of the dollar.
Commodities Trading
Impact of CPI on Gold and Oil Prices:
A higher CPI (Consumer Price Index) can increase demand for safe-haven assets like gold. This is because higher inflation means a decrease in the purchasing power of money. Additionally, high inflation might lead to an increase in oil prices.
Final Remarks
The Consumer Price Index (CPI) is a crucial index in every country’s economy. The more this rate decreases or remains stable, the higher the national currency’s value will rise in comparison to other currencies over the long term, strengthening the currency. Governments typically strive to reduce or stabilize the Consumer Price Index to control their country’s economic situation and enhance their population’s purchasing power.