Consumer Price Index
The Consumer Price Index (CPI) measures the average change over time in the prices paid by consumers for a basket of goods and services.
Meaning in Practice
The CPI tracks price movements across categories such as food, housing, energy, and transportation. It is calculated by statistical agencies using a weighted basket that reflects typical household consumption patterns. The index is updated regularly, usually monthly, to monitor inflation trends.
Why It Matters
The CPI is a primary indicator of inflation and purchasing power. Policymakers use it to guide monetary policy decisions, including interest rate adjustments. It also influences wage negotiations, pensions, and inflation-linked contracts.
Market Impact
Higher-than-expected CPI readings often lead to expectations of tighter monetary policy and rising bond yields. Lower inflation readings may support equities and reduce rate hike expectations. Currency markets react strongly to CPI surprises due to their impact on interest rate outlooks.
Example
If the CPI increases by 3 percent year-over-year, it indicates that the average price level of consumer goods and services has risen by 3 percent compared to the previous year.