When inflation occurs in the U.S., the purchasing power of the dollar decreases. Either way, the Fed’s rate-setting group known as the Federal Open Market Committee (FOMC) is looking for sustained evidence that inflation is whipped before it moves to cut interest rates from a 23-year high. And while the latest CPI report doesn’t change the FOMC’s calculus, experts say, it does put the final nail in the coffin for a rate cut at the next Fed meeting. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI), which measures changes in the prices received by U.S. producers of goods and services.
The methodology used to calculate the CPI has undergone numerous revisions. According to the BLS, the changes removed biases that may have caused the CPI to overstate the inflation rate. An updated methodology includes changes in the quality of goods and substitution.
What Is the Consumer Price Index (CPI)?
The index increased by 0.2% in July 2024 on a seasonally adjusted basis after declining by 0.1% in June. It is based on the index average for the period from 1982 through 1984, which was set to 100. A CPI reading of 100 means that inflation is equal to the level in 1984, while readings of 175 and 225 would indicate a rise in the inflation level of 75% and 125%, respectively. After all, the S&P 500 rose more than 6% in the first month of 2023 thanks in part to expectations that the Fed would pivot away from its aggressive policy on interest rates sometime later this year.
U.S. March Inflation Data Exceeds Expectations Again
- There is actually no such thing as the Adjusted CPI, officially speaking.
- There are many things wrong with our current methods of measuring inflation – starting with the obvious fact that there are far too many measures, which produce figures which vary over a large range (2 to 1 typically).
- Below please find a selection of commentary from economists, strategists and other market pros on what to expect from the next CPI report, sometimes edited for clarity or brevity.
- The weight of each component of the basket is in proportion to how they are sold.
The PPI is a more accurate measure of a country’s economic output because it does not rely on consumer demand. When there is an upward change in the CPI, there has been an increase in the average change in prices over time. This leads to adjustments in the cost of living and income, a process referred to as indexation. In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics, demographics, real estate, cost of living indexes and more. A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance.
Experts Weigh in on the Next CPI Report
User fees and sales or excise taxes are included, while income taxes and the prices of investments such as stocks, bonds, or life insurance policies are not part of the CPI. The fixed basket used in CPI calculations is static and sometimes misses changes in the prices of goods outside the basket. Since GDP isn’t based on a fixed basket of goods and services, the GDP deflator has an advantage over the CPI. Changes in consumption patterns or new goods and services are automatically reflected in the GDP deflator but not the CPI. The Consumer Price Index is calculated by measuring the price in one period for a fixed basket of consumer goods and services compared to previous periods. Inflation is a rise in the general level of prices and is often expressed as a percentage.
There are indexes for the U.S., the four Census regions, the nine Census divisions, two sizes of city classes, eight cross-classifications of regions and size classes, and 23 local areas. The BLS publishes CPI data monthly for indexes related to the U.S., the four Census regions, and some local areas. Kiplinger is part of Future plc, an international media group and leading digital publisher. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail. There’s more, but the bottom line is that the Fed believes the PCE index has some critical advantages over CPI when it comes to setting monetary policy. “When is the next CPI report?” was a question no one was asking back in the days of 2% inflation readings.
Personal consumption expenditures (PCEs) are another measure of imputed household expenditures and how those costs change over time. PCEs are summarized range trading versus trend following in the Personal Consumption Expenditures Price Index, released monthly by the BEA, and measure price changes in consumer goods and services exchanged in the U.S. economy. The Producer Price Index (PPI) measures the domestic output of raw goods and services. It recognizes that as producers face input inflation, the increases in their production costs are passed on to retailers and consumers.
There’s also the very real fear that rising rates could cause the economy to fall into a recession. There are many things wrong with our current methods of measuring inflation – starting with the obvious fact that there are far too many measures, which produce figures which vary over a large range (2 to 1 typically). The CPI is so deeply flawed that the Federal Reserve decided decades ago to ignore it for purposes of calibrating monetary policy. The Fed relies instead on a measure called the Personal Consumption Expenditures Index (PCE), which is widely regarded as a superior (though still imperfect) metric. The monthly CPI is still treated as the most important inflation metric by most of the leading media channels.
Core CPI, which strips out volatile food and energy costs, accelerated 0.4% last month vs a forecast for a 0.3% gain. Headline inflation rose 0.3% last month, the Bureau of Labor Statistics said Tuesday, while economists were looking for a 0.2% rise in the index. On an annual basis, headline inflation increased 3.1% vs expectations for 2.9%. CPI-W is used to adjust Social Security payments as well as other federal benefits and pensions for changes in the cost of living. It also shifts federal income tax brackets to ensure taxpayers aren’t subjected to a higher marginal rate as a result of inflation.
In the broadest sense, the CPI and unemployment rates are often inversely related. This is not always the case in every economy, but the Federal Reserve often attempts to decrease one metric while balancing the other. For example, in response to the COVID-19 pandemic, the Federal Reserve took unprecedented supervisory and regulatory actions to stimulate the economy. Be mindful that the CPI is published using national data, even though employees may be more suited to using local data to better understand their specific situation. In addition, some workers covered by collective bargaining agreements may have their contracts and wages tied to changes in CPI.
How Is the Consumer Price Index (CPI) Used?
As a result, the labor market strengthened and returned to pre-pandemic rates by March 2022; however, this stimulus has resulted in the highest CPI calculations in decades. In addition to the national CPI indexes, BLS publishes CPI data for U.S. regions, sub-regions, and major metropolitan areas. The metro data is subject to wider fluctuations and is useful mainly for identifying price changes based on local conditions. The first is used to determine the current cost of the weighted average basket of products, while the second is used to analyze the year-over-year (YOY) change. The GDP price deflator captures changes in an economy’s consumption or investment patterns. Trends observed in the GDP price deflator are usually similar to the trends in the CPI.
Per the BLS, prices for the goods and services used to calculate the CPI are one moment while we securely connect you to kraken .. collected in 75 urban areas throughout the country and from about 23,000 retail and service establishments. The weight for an item is derived from reported expenditures on that item as estimated by the Consumer Expenditure Survey. For the record, the CPI report is released monthly by the Bureau of Labor Statistics, based on price data collected over the course of the month. The difficulties of measuring inflation, and of comparing different ways of measuring it, are complex.
The Consumer Price Index for All Urban Consumers (CPI-U) represents 93% of the U.S. population not living in remote rural areas. It doesn’t cover spending by people living in farm households, institutions, or on military bases. CPI-U is the basis of the widely reported CPI numbers that matter to financial the premium bond conundrum markets.The BLS also publishes the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W covers 29% of the U.S. population living in households with income derived predominantly from clerical employment or jobs with an hourly wage.
The next CPI report is giving traders and investors even more agita than usual. Fears are running high that a hot January inflation print will force the Federal Reserve to send interest rates ever higher and keep them there for longer. By setting a release date and time for updates, everyone can access the latest inflation information simultaneously, preventing any advantage for individuals in the markets or elsewhere. More importantly, the Fed could even start cutting rates by the middle of next year, they add. A softer-than-expected CPI report could mean the Fed is done raising interest rates this cycle. That said, CPI is the better known inflation gauge and it very much informs the Fed’s thinking.
