CPI

The Consumer Price Index (CPI) is considered one of the most effective indicators revealing the current state of inflation in an economy. CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100. If the CPI for the current period is 112, the indication is that it now costs 12% more to buy the basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

As the economy grows, there is by definition, the existence of inflation. However, inflation exceeding 2% is recognized by most central banks - including the Bank of Canada and the Bank of England - as an indication that the rate of inflation is too great for the economy to safely sustain. Growth above this the 2% threshold threatens to erode the buying power of the native currency and central banks will usually tighten monetary policy in a bid to reduce inflation to acceptable levels.

What is Core CPI?

The Core CPI is calculated in the same manner as the CPI but items with high volatility – such as energy and food – are excluded. Because these products are vulnerable to dramatic price swings, they can lead to a distortion in the CPI calculation. For this reason, the Core CPI is considered a more accurate measure of inflation.

How CPI News Affects Markets

FX Market

A CPI that continues to trend upwards month over month could be a signal that inflation is eroding buying power to the point that the Central Bank will raise interest rates to curb spending. An increase in interest rates may lead to an increase in demand for the currency as the higher interest rates makes the currency more attractive for investors.

Bond Market

Fixed income holders are always concerned about a rise in interest rates making their bond holdings worth less than other forms of investment securities. Higher CPI values could be a signal that interest rates may rise in a bid to combat inflation and this could put downward pressure on the bond market.

Stock Market

Stock prices are susceptible to interest rate hikes as increased interest rates may delay or even prevent companies from borrowing capital to grow their business. If the CPI results indicate that inflationary pressures are present, expect to see a pull-back in the stock market until it becomes clearer how the Central Bank will respond.

Market Relevance

High – CPI is an important indicator of the level of inflation in an economy.

Publication Frequency

CPI results are published monthly.

Influence on the Markets

CPI is regarded as having a moderate influence on the markets.