Understanding the Consumer’s Price Index (CPI) as a Fundamental Indicator

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The Consumer’s Price Index (CPI) is an indicator which measures the average price changing that is paid by consumers to a particular commodity or service. This is one of a very common inflation indicator that is used to assess the effectiveness of government’s policy within a country. The CPI is released by Bureau of labor Statistic, the United States Department of Labor in monthly basis. It’s released at eight P.M. in the 13rd day of the month.

CPI measures the increasing level of commodities and services amongst consumers. The increasing point in the CPI, indicates the rising inflation level which (at the end) causes the declining of obligation price and rising of the interest rate. The rising of interest rate will strengthen the currency of particular country. So it’s simply said that if CPI of a particular country rises up, it means its currency will also rise up.

In the economic view, CPI is generally known as a living cost index since its measurement touches the consumer’s level. It’s different with the Producer’s Price Index (PPI) which only deals with the producer’s level. When other inflation indicators measures only local products, the CPI touches the imported commodities as well. This leads to a weakness point of this indicator because this indicator only takes a few number of product samples. The CPI analysts typically focuses only on the core CPI, a CPI variant which is not including the elements with a very unstable price changing or commonly known as “the CPI excludes food and energy”. Many of them say the core CPI can measure the inflation level more accurately.

In scale A-E where A refers to a very-important indicator and E refers to a not-important indicator, CPI is included as a medium B indicator. But the CPI excluded food and energy which doesn’t show the volatile part, is an important indicator in currency market which is included as a grade A indicator. It’s because market assumes that CPI excluded food and energy is reflecting the inflation level more clearly than other conventional CPI.

CPI report consists of percentage of the changing in several components:

  1. All Categories
  • Food and beverages
  • Housings
  • Clothings
  • Transportations
  • Health facilities
  • Recreations
  • Education and communication aspects
  • Other commodity and services
  1. Special Index
  • Energy
  • Food

The final result of the CPI is : (Total all categories) – (Special Index).

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