CPI: All You Need to Know
Of all the macroeconomic trends that the world has faced since the beginning of the COVID-19 pandemic three years ago, inflation has perhaps been one of the greatest causes for concern. Central Banks from Japan to the United States have struggled to adapt their monetary policies to the tidal wave of rising prices. Recent times have seen central banks like the Bank of England and European Central Bank adopt hawkish monetary policies in response to inflation; Wednesday’s release of inflation figures for the U.K. and Eurozone could shed light on whether key central banks will choose to continue raising interest rates.
What Is CPI?
The Consumer Price Index (CPI) is the most widely used tool to measure inflation, or its inverse, deflation. This important tool is used to calculate how the price of a wide range of market goods shifts over time.
In addition, the Dollar (DX)’s relative purchasing power can also be estimated indirectly with the CPI, by seeing whether an amount of goods can be purchased with more or less money compared to the previously-measured period. The prices of over 90,000 goods are monitored by the Bureau of Labor Statistics every month; when inflation rates are quoted in the media, it is important to understand whether the periods of comparison are months, quarters, or years, in order to accurately understand the time range of price increases. Similarly, in the United Kingdom, the Consumer Price Index data is gathered by the Office for National Statistics (ONS) in alignment with European regulations, while in the Eurozone it is gathered by Eurostat. Like American CPI, both of these are used to measure inflation and deflation.
However, some raise the concern that the CPI has drawbacks as a measure of the U.S. economy’s health, as it fails to account for the diversity of consumption patterns adopted by American consumers, and may even underestimate inflation. Despite these potential disadvantages, it’s still preferred by professional economists and policymakers alike to judge whether inflation is within the ‘ideal’ two- to three-percent range. Today’s CPI Outlook
Journalists and readers across the financial media landscape have followed the U.S.’ periodic CPI releases avidly throughout much of this year. With inflation rates in recent times having reached levels unseen in many American citizens’ lifetimes, fountains of ink have been spilled regarding the causes and effects of the economic headwinds facing the American marketplace. (Source:Investopedia)
This Week’s CPI Releases
Wednesday’s data releases from the Eurozone and the United Kingdom showed a slowdown in inflation for both economies, but the coast is not clear yet.
According to the latest figures, British consumers are now facing the highest inflation rates of all their peers in Western Europe. The Office for National Statistics (ONS) showed consumer prices increased by 0.3% less than predicted over March, but that year-over-year inflation is still hitting double-digit figures at 10.1%. While this figure has come down from the four-decade inflation peak reached in October 2022, it is clear that the average Briton is feeling pressure on his or her pocketbook as wage growth has not risen at the same rate.
Accordingly, some analysts are raising the spectre of further interest rate hikes by the Bank of England following the central bank’s next summit on May 11th. Predictions are that interest rates could even hit five percent by autumn if inflation doesn’t cool down by then.
Across the Channel, Wednesday’s Eurozone CPI release painted a relatively less grim picture of the state of the European economy. As in the United Kingdom, consumer prices slowed their growth in the month of March, but by a larger margin.
While inflation hit an annualised rate of 8.5% in February in the Eurozone, March’s data showed this key economic measure sinking below 7%. Since last September, inflation has been beating a slow retreat across the Eurozone, but whether the European Central Bank will continue hiking interest rates remains to be seen.
How Are Markets Reacting?
Wednesday’s CPI data releases may have left their mark on the trading floors of Europe yesterday. Breaking its relative uptrend of recent weeks, London’s FTSE 100 (UK 100) closed down by over 0.1% yesterday while continental Indices the DAX 40 (Germany 40) and Paris-based CAC 40 (France 40) showed rather positive results, ending up in the black by just under 0.1% and over 0.2% by the ring of the closing bell.
All in all, it seems that the ongoing saga of the struggle against consumer price inflation has not yet reached its final chapter. Markets will have to wait and see how the latest macroeconomic trends play out.