What is Consumer Price Index (CPI)? Go into detail

What is consumer price index

What is Consumer Price Index (CPI)?

The Consumer Price Index is the most anticipated thing by traders. This is because the index, published monthly by the United States Bureau of Labor Statistics, plays an essential role in determining inflation.

The CPI can be beneficial for determining the cost level at a given price unit. The CPI can also indicate the average level of goods and services. This is commonly referred to as the representative group of average consumer purchases.

What is consumer price index
What is consumer price index

For those curious about the meaning of the Consumer Price Index (CPI), we will discuss it in depth in this article. Not only understanding this article will also discuss how to measure it for its use in real life. Come on, check out the full review below!

Definition of Consumer Price Index (CPI)

As mentioned earlier, the Consumer Price Index, commonly abbreviated as CPI, is a measuring tool to assess the average change in the price of goods and services, which is considered very important. The CPI can be measured or calculated by monitoring price changes for each item.

CPI will generally be published every month after estimation. This makes the data published this month the result of the previous month’s CPI assessment. They will then process the data to measure the inflation rate that occurs each year.

Nevertheless, CPI data results will usually be published every month. However, many countries prefer to store this data and publish it publicly every three months. Some of these countries include Australia and New Zealand.

The occurrence of inflation in a country can quickly provide a change in the fiscal policy that applies to a country. In addition to using the CPI, many other economic indicators are used to assess the significance level of inflation, ranging from personal consumption index, producer prices, prices of imported goods, and labor cost index to unit labour cost.

For example, large countries such as the United States use additional measurement tools to calculate the inflation rate. An other measurement tool used is personal consumption expenditure (PCE) or personal consumption expenditure data.

Unlike the United States, European countries are more likely to use the Harmonized Index of Consumer Prices (HICP) to measure their country’s inflation rate.

Types of Consumer Price Index (CPI)

Two types are commonly used to measure the CPI, namely the CPI-U (Consumer Price Index for All Urban Consumers) by household group or urban individual and the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) index) office workers. , Following is the explanation of the two types of CPI:

1. CPI-U (Consumer Price Index for All Urban Consumers)

The CPI-U is a consumer price index for all urban household groups or individuals, commonly referred to as urban. This index is the largest as it represents 88% of the United States population, with a better representation of the general public. The United States Bureau of Labor Statistics improved the CPI measurement in 1978 by introducing a broader target population.

This type of CPI is based on spending, mainly from the entire population living in urban or metropolitan areas. In addition, the CPI-U also covers many occupations, such as professionals, entrepreneurs, and even those unemployed and retired.

2. CPI-W (Consumer Price Index for Urban Salaried and Clerical Workers)

The CPI-W can be considered the consumer price index for urban wage earners and clerical workers. The CPI measure based on this group of office workers became the focus of the United States Bureau of Labor Statistics from around 1913 to 1977.

The CPI-W measure is based on households with more than half of their income from administrative functions. In addition, the CPI-W also includes groups where one of the recipients is employed for approximately 37 weeks in 12 months.

The CPI-W reflects changes in the cost of benefits paid to Social Security users. The CPI measures at least 28% of the country’s population.

How to Measure the Consumer Price Index (CPI)

The Consumer Price Index (CPI) is the average price change among consumers for certain goods and services. In the United States, the method used to measure the CPI is divided into the two largest population groups, namely urban household groups or individuals called CPI-U (CPI-Urban) and office workers called CPI-W. Middle.

Meanwhile, the Bureau of Labor Statistics (BLS) or the United States Bureau of Labor Statistics is the primary reference for comparisons using 36 months of average price movements. The original comparison reference value used as a reference is 100.

Then, the BLS uses the measurements with formulas regarding reference base numbers. For example, if the CPI is 110, the average price increases by 10%. Meanwhile, if the CPI value is 90, the average price has decreased by 10%.

The assessment results cannot be used as a reference for detailed data and aggregated. However, these results are sufficient to assume that price level changes represent two large population groups in the United States: the household group (CPI-U) and office workers (CPI-W).

Categories of goods and services that can be measured by the Consumer Price Index (CPI)

At least eight categories of goods and services can be measured or evaluated in the Consumer Price Index (CPI). The many categories of goods or services include basic materials for housing or residence, food and drink, transportation, health, clothing, entertainment and recreation, education and communication, and many other goods and services.

Types of Inflation Data

Based on an estimate of the Consumer Price Index (CPI), two found two inflation figures including:

Headline Inflation

The Consumer Price Index (CPI) will include various information related to changes in the aggregate, starting with energy prices to price movements.

Core Inflation

The Consumer Price Index (CPI) will also process information without fluctuating energy and food prices. However, CPI only gives a clear picture of the change in the price of a commodity.

In addition, data loaded with core inflation tend to be more volatile. This is because headline inflation incorporates all the information and can estimate core inflation. Core inflation is also compiled to be the best benchmark for inflation. In addition, core inflation will usually also be targeted by the central bank in the local country.

The inflation data included in the CPI may change the market in the short term. Inflation data can even influence the formulation of a particular monetary policy. Therefore, the Central Bank will need to be able to target inflation that often occurs.

An indicator that has a significant role in the currency market, namely the Consumer Price Index. The value listed in the CPI is substantial because of a correlation between labour growth and the inflation rate in a country.

The inflation rate is quite sensitive as it determines the price consumers must pay to obtain a product or service. If the price is high or expensive, the business environment will be significantly affected by the rising cost.

Importance of the Consumer Price Index (CPI)

Consumer Price Index (CPI) data is crucial because it can show how fast the prices of goods and services rise. When prices rise, it can understand that inflation is occurring. Meanwhile, when prices are stable, there will be deflation.

The central bank will use the inflation rate as a guide in setting a policy, such as increasing, decreasing or maintaining interest rates. This is done to encourage or control the expenditure of money by the consumers so that it ultimately affects the inflation rate.

This CPI data will be covered and monitored by many relevant parties, large and continuous fluctuations in inflation rates will influence the central bank in setting monetary policy.

For now, most central banks will target inflation domestically. This means that there is a specific inflation rate target that the central bank must achieve. One of the things that are being done to support this goal is that the central bank will use interest rates and monetary policy tools to control the price stability in the market.

Impact of publishing the Consumer Price Index (CPI) in the market

When the Consumer Price Index (CPI) data is published, it will affect many banks, one of which is undoubtedly the need to cut interest rates. It doesn’t stop there. Many banks have turned negative, so assessing them requires other tools, such as quantitative easing, to stimulate consumer spending. This did trigger high inflation.

However, the effect of publishing CPI data is not always negative. Several examples illustrate the positive impact of the release of inflation data, including the Bank of Japan and the European Central Bank. Both banks have been successful in bringing down the inflation rate to the target that has been assigned.

Therefore, when the inflation report is released every three months, it will increase or decrease. This allows the market to anticipate the policies set by the central bank. Trader usually knows and understands that when prices are higher, they will generate higher income.

What’s more, when the company’s profits increase, the share price will also increase, with the potential for investors to increase their wealth. Not only this, but the company will also be healthy if it experiences an increase in revenue.

Yet, inflation is still a nightmare. This is because of the potential for volatility that can trigger distortions in a country’s economy. Generally, the policy that is decided to overcome this is not to increase the price of goods but to increase the production quantity further.

Moreover, the loss is also one of the threats that companies will face in the event of inflation. This loss will be more visible when distributors or suppliers prefer to increase the price of essential goods. Many may experience an increase in other burdens, namely when employees demand an increase in wages to meet the rising cost of living.

ending

Based on the above explanation, Consumer Price Index (CPI) can be concluded as a tool used to measure or estimate the average change in the price of goods and services. In addition, it can also use CPI changes to measure price changes relative to the current cost of living. The CPI value has a significant role as it is one of the most widely used references for determining inflation and deflation.

CPI measures the average price change over time in what consumers pay for goods and services, more commonly known as inflation. CPI provides a solution to assess the overall price level in an economy. Therefore, the average measurement of prices of goods and services close to individual consumption patterns is a guideline for calculating the CPI.

While a measure of the variation in the price of retail and other goods based on consumer payments, the CPI excludes items such as savings and investments and typically excludes spending by foreign visitors.

CPI can be called an economic indicator. Surprisingly, this tool has become one of the most widely used and effective in overcoming government economic policies. The CPI gives many ideas to governments, businesses and citizens about various price changes in the economy. Besides this, CPI can also act as a guide to making the right economic decisions.

Meanwhile, the CPI and other constituent components can also be used as deflators for other economic indicators, such as retail sales and hourly or weekly earnings. Also, the CPI can be used to gauge consumer dollars and their purchasing power. The dollar’s purchasing power generally decreases when the overall price level rises, and of course, it can be the other way around.

However, regardless of the positive or negative effects of inflation, you need to know that inflation is an economic condition that occurs regularly in every country with its currency. Inflation is sometimes scary. For some parties, inflation has proved to be able to deliver benefits. Therefore, as a party highly affected by market prices, one must understand the leading causes of inflation and how to deal with it appropriately.

Read More – What is the Pareto Principle? Importance of the Pareto Principle.

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