Economic Indicator: The Consumer Price index

Consumer price index

What is the Consumer Price Index?

The Consumer Price Index is well watched economic indicator that analyses the prices of a group of consumer goods and services like transportation, food and medical care. The Index is calculated by taking note of the prices changes in each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to in order assess the changes associated with the cost of living. This is also the most used method in identifying periods of inflation or deflation in a country because it gives a clear indication of change in the standard of living in a country.

There are two types of CPIs that are reported on a monthly basis, The CPI-W which is the analysis for Urban Wage and Clerical Workers and the CPI-U which is for Urban Consumers and a better representation of the general Public.

The Importance of Consumer Price Index

The CPI is used mainly by the President, Congress and the Federal Reserve Board to formulate fiscal policies that will be based on the latest finding in the economy this will also give a clear warning when the problem of inflation or deflation is at bay. Since the CPI is examines the changes in the Price of commodities and services purchased by urban consumer, it is a useful tool for investors in determining where that market will eventually lead.

How the CPI affects the Economy

The CPI does not directly affect the Economy because it only serves as a representation of the Economy itself. The effect of the CPI is a mere reaction to what the data presents. The CPI collects and interprets the data from how consumers have moved in the past markets trends and will be used in order to effectively strategize against problems in inflation or deflation in a country.

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