CPI: All You Need to Know

Of all the macroeconomic trends that the world has faced since the beginning of the COVID-19 pandemic over two 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. January 12th’s American Consumer Price Index data release could shed some light on whether the Federal Reserve will continue raising interest rates following the upcoming February 1st summit.

What Is CPI?

The 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.

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. 

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.

Ahead of the CPI Release

In anticipation of the CPI release, the general expectation seems to be that the rate of consumer price increases slowed down somewhat over the last month of 2022. Moreover, many experts are in agreement that the data to be released on January 12th at 8:30 EST is likely to show consumer prices having slowed their gallop skyward slightly in December. It’s estimated that consumer prices fell by 0.1% in the last month of the year, compared to a rise of 0.1% observed in November. 

One possible factor behind this slowdown could be the recent falls in the price of petroleum. In December, the price of Oil (CL) dropped 1%, while that of international benchmark Brent Oil (EB) posted an over 1.4% fall. With apprehension regarding the fate of fossil fuel supply lines having gripped economic policymakers throughout much of last spring and summer due to the conflict between Ukraine and the Russian Federation, this may have come as some relief to producers and consumers alike. 

Despite this predicted drop, Core CPI, which excludes energy prices, is expected to have risen by 0.3% in December 2022, a slight increase from November’s 0.2% jump. If this prediction is borne out, Core CPI will have risen by 5.7% in 2022.

With the tide of inflation possibly starting to retreat, all eyes will be on the Federal Open Market Committee’s decision in February. Many are already expecting that the era of supersized interest rate hikes is behind us, and the Fed could even move to raise interest rates by only 25 basis points. However, a higher hike of 50 basis points could still be well within the realm of possibility. (Source:CNBC)

How Are Markets Reacting?

The day before the CPI release, it seemed that the mood on the trading floors of Wall Street was rather buoyant. Ahead of an expected positive inflation reading to be released today, the S&P 500 (USA 500) showed a nearly 1.3% jump over the course of trading Wednesday, while the Nasdaq (US-TECH 100) and Dow Jones Industrial Average (USA 30) had increased by almost 1.8% and 0.8% respectively by the ring of the closing bell.

All in all, while inflation’s deleterious influence may have eased somewhat in December, it remains to be seen whether yesterday’s optimistic trends will be maintained over the course of coming trading sessions and whether the Fed will ultimately opt for a lower interest rate hike on February 1st. Traders and investors alike will have to wait and see how the latest macroeconomic trends play out.