The Consumer Price Index and how it affects the Economy of a Country

Consumer Price Index

What is the Consumer Price Index?

The Consumer Price Index (CPI) is the benchmark for inflation guide for most countries. The Consumer Price Index uses a “Basket of Good” which aims to compare a set of goods from year to year. The Index focuses on products that are most bought and used by consumers on a daily basis.

The Consumer Price Index is the principle meter of the price of goods and services, investors closely observe the Consumer Price Index because it is a clear indication whether the economy is experiencing inflation, deflation or stagflation.

How the CPI affects the economy

The CPI is a broad measure of inflation within a certain economy. It is closely related to the cost of goods and services in a country, which can greatly impact the value of a currency. The CPI calculates the weighted average of consumer goods and services within the basket, which includes transportation costs, food and energy in a country. This helps economists figure out the changes in an individual’s cost of living.

The CPI and the Market

Price volatility can be troublesome for both the investors and equities. If the prices are rising, it is normal and can be expected that bond payments are worthless, effectively lowering the bond’s yields.  On the other hand, deflation can be a negative sign indicating a decline in consumer demand. If this is the case, manufacturers are forced to drop prices in order to sell their products.

Final thoughts

The CPI is a one of the most watched and most important economic indicator. The CPI is also used to adjust the wages, retirement benefits, tax brackets and other important economic indicators. It can tell investors some things about what could happen in the financial markets which is affected with consumer prices.

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