The US Federal Reserve (Fed) announced this week the release of the consumer price index (CPI), which exceeded expectations and caused a general decline in the risk investment market, weakening expectations of a Fed rate cut. This article provides a detailed explanation of what CPI is, its composition and calculation, and its impact on inflation and the stock market.
Table of Contents:
What is CPI?
How is CPI calculated?
What is the annual growth rate of CPI?
Changes in the weightings of US CPI
A deep dive into US consumer prices
What is core CPI?
The impact of CPI on the stock market
The US Department of Labor released the latest CPI data this week, showing that the annual growth rate of US CPI in March (compared to the same period last year) climbed to 3.5%, higher than the expected 3.4%.
After excluding the volatile prices of food and energy, the core consumer price index in the US for March showed a year-on-year increase of 3.8%, also higher than the expected 3.7%. This indicates that inflation did not decline in March, deepening expectations that the Federal Reserve may maintain high interest rates for longer.
CPI, or Consumer Price Index, is a commonly used indicator for measuring the level of prices in a country. CPI is usually published regularly by the government or authorized agencies, and it calculates the percentage change in the cost of purchasing representative goods and services over a certain period of time by surveying their prices.
Generally, CPI is calculated based on average prices over a certain period, which can be a month, a quarter, or a year. Since CPI is an important indicator for assessing the inflation rate of an economy, it has received particular attention during the current high inflation in the United States.
The formula for calculating CPI is as follows:
CPI = (Current Cost/Base Period Cost) x 100
The base period is the reference point and is usually set at 100. The result of CPI represents the percentage change in the prices of goods and services at the current time compared to the base period.
Specifically, the calculation of CPI involves selecting a basket of representative goods and services, including food, housing, transportation, healthcare, education, entertainment, and other consumer goods and services, and calculating weighted averages based on their respective weights. The formula and methods of CPI may vary in different countries or regions, but the basic principles are similar.
As the name suggests, the annual growth rate of CPI refers to whether the current data is higher or lower compared to CPI from 12 months ago, serving as a measure of price changes. The calculation method is: (Current Year CPI – Previous Year CPI) / Previous Year CPI.
Starting from January 2023, the US Department of Labor announced a major adjustment to the CPI weighting calculation rules. Previously, the CPI weights were updated every two years, but now they are updated annually. The changes in CPI weights in the US for 2023 are as follows:
Housing: 44.38% (+2%)
Entertainment: 5.38% (+0.3%)
Food: 14.37% (+0.1%)
Apparel: 2.47% (no change)
Other goods and services: 2.67% (-0.1%)
Medical care: 8.1% (-0.4%)
Education and communication: 5.84% (-0.6%)
Transportation: 16.74% (-1.4%)
In general, focusing solely on the index of CPI itself is not significant. What needs attention is the annual growth rate of CPI, which is also considered as the inflation rate and an important reference for the government.
According to financial data, it can be observed from the detailed consumer price index items that housing, transportation, and healthcare indices still contribute the most to monthly price growth, and the energy index increased from -1.74% in February to 2.13% in March.
The areas that experienced more significant declines were new and used car sales, as well as leisure and education indices. However, overall, inflation did not make significant progress in March 2024.
Readers will usually come across another index called Core CPI, which refers to the consumer price index obtained by excluding the prices of volatile energy and food. This design is because food and energy prices are often more easily influenced by seasonal factors or unexpected events (such as wars). Therefore, in order to observe price changes more accurately, core CPI is usually considered as a priority reference indicator by most governments.
CPI index is one of the economic indicators that the market pays great attention to, especially in the current context where the Federal Reserve is committed to combating high inflation. If CPI continues to decline, it means that the Fed’s tightening monetary policy is effective and prices continue to decrease.
On the other hand, if the CPI index remains high, it means that the Fed may need to further tighten monetary policy. If it chooses to raise interest rates, funds are likely to flow out of the risk investment market more quickly, which is generally not favorable for cryptocurrencies and the stock market.
However, changes in the CPI index are not the only factors that affect the market. Prices are influenced by factors such as corporate performance, government policies, and geopolitical risks. Therefore, investors need to consider various factors comprehensively in order to formulate investment strategies.