What is the Consumer Price Index?

The end Consumer Price Index (CPI) for December 2022 was released this morning and it marked a slowdown in the rise in prices, marking the smallest 12-month increase since October 2021, according to the Department of Labor. The sharp decline was mostly due to a drop in gas prices, which fell 9.4% in the month, after a 2% drop in November.

Indices that saw slight increases in December included accommodation, home furnishings and operations, motor vehicle insurance, entertainment, and clothing indices. Used cars and trucks, and airfares are down for the month. This latest report also highlights significant year-on-year changes, with the energy index increasing 7.3% for the 12 months ending in December, and the food index increasing 10.4%.

What is the consumer price index?

The consumer price index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The index measures the cost of things like food, gas, electricity, new cars, clothing, medical care, shelter, transportation, and more.

“That ‘basket’ of goods and services is designed to be representative of what households actually spend their money on,” said Matt Kolyar, Economist at Moody’s Analytics. “That spending data comes from the Consumer Expenditure Survey conducted by the BLS each year. For example, gasoline represents about 4% of total spending for the average household. The CPI gives a 4% ‘weight’ to gasoline prices. The rest of the index captures things like rent, food, car payments, insurance, etc. The BLS collects the prices of these goods and services each month to calculate changes from last month.

What the CPI can tell you about the economy

At the macro-level, the CPI serves as an economic indicator. It tells economists and policymakers how the economy is performing and how best to shape policy to adjust for rising costs. One of the ways the Federal Reserve does that is by using one of its monetary policy tools: the federal funds rate.

“The Federal Reserve is mandated to ensure price stability and the CPI offers an indication of whether they are meeting that mandate,” Kolyar said. “The Federal Reserve’s preferred measure of inflation is personal consumer spending, but the CPI is still given consideration. If inflation is deemed too high, the Federal Reserve has tools to indirectly destroy demand in the economy which will reduce the increase in price pressure.

It also helps companies make decisions about how to run their businesses, how to spend money, whether it’s a smart time to borrow and expand, or whether they need to implement cost-cutting measures. . And the CPI gives everyday consumers a look at how their regular spending changes each month and how it affects their wallets.

How CPI informs your own currency options

Checking in on the latest CPI will not only keep you updated on what’s happening in the economy, but it will help you make smarter decisions about how you manage your own personal finances.

  1. This may play a role in which businesses you invest in and how much. Although it is impossible to predict how the market will behave or what a company will do over time, rising costs can make borrowing more expensive and put more financial stress of companies you are investing in or considering. investments in. “For investors, this means that businesses borrow less. That’s less expansion and investment. It makes so-so-yet-unprofitable companies that are considered “growth stocks” is not very appealing. Higher borrowing rates now reduces the value of future cash flow,” said Kolyar.
  2. This can change your wages, social security payments, government pensions, government assistance, and more. Changes in the CPI can lead to cost of living adjustments (COLA) that affect how much you can receive in government benefits or assistance and even lead to changes in the state’s minimum wage. Knowing how much you can expect to receive in income, benefits, and payments each month—and how that will change—will help you cover your current expenses and better plan for the future.
  3. It can tell you how your budget is changing and where to make changes. When you are out shopping groceries and fail to pay close attention to the price tag of your items, or if you set most of your bills to auto-pay, you may miss small increases that add up to a large portion of your income. “Since the CPI represents all goods and services purchased for consumption by urban households, if the rate of inflation increases rapidly, the purchasing power of consumers will quickly decrease. In other words, the consumer dollars can’t buy as much as they used to,” said Justin Begley, Economist at Moody’s Analytics. Keeping tabs on how CPI prices change can help you adjust your budget to account for changing costs and ensure your finances don’t go astray.

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