US macro, Consumer Price Index (CPI)

The consumer price index (CPI) is one of the US macroeconomic data most followed by financial market operators. Inflation has in fact a strong impact on everyone's real life: consumers, by increasing the prices of goods and services; of companies; increasing the costs of loans and production inputs; of the financial markets, negatively affecting the prices of bonds and shares.

CONSUMER PRICE INDEX: WHAT IS IT

It is the most important inflation index. Measures the average change in retail prices for goods and services. It is a monthly index.

CONSUMER PRICES: HOW IT IS PROCESSED

The elaboration of the consumer price index is based on the survey of the prices of goods and services that belong to 200 product categories, then grouped into 8 large groups: housewares, food and beverages, transport, medical care, clothing, leisure, education, other goods and services. During the first three weeks of the month, the Bureau of Labor Statistics records the prices charged by 23,000 points of sale in 87 metropolitan areas of the United States of America. The same basket of goods and services is analyzed each month. Adjustments to the processing system are periodically made for products whose price can vary significantly due to seasonal factors such as, for example, oranges and other seasonal fruit. Other extraordinary variations can affect assets such as oil and its derivatives, often due to geopolitical reasons. To prevent variations of the two types just mentioned from altering the perception of the true trend of retail inflation, the so-called "core" index is calculated, in which the prices of food and energy products are not included. Every two years the associated "weights" from each category are changed to reflect the changes that have occurred in the consumption pattern of Americans.

CONSUMER PRICES: THE MOST IMPORTANT DATA

The monthly and annual variation of the overall index and of the "core" index. The price index of energy products is also followed very closely. Indeed, energy consumption is difficult to reduce, even in the case of large price increases. And the resulting increase in spending can negatively affect spending on other products or services.

CONSUMER PRICES: IMPORTANCE FOR THE MARKET

Inflation worsens the quality of life by reducing the purchasing power of citizens' incomes. In the short term it can increase the revenues of companies, but with a slightly longer run it ends up also increasing the costs of all production inputs, and of loans. If inflation grows at a high rate, then it is possible for the Federal Reserve to raise interest rates, and this usually has a negative impact on financial markets.

Bonds

If retail inflation turns out to be higher than expected, it is possible that bond prices will fall, and yields will rise. With inflation in line with expectations, or falling, it is possible that prices will not change, or even rise.

Actions

Inflation can lead to an increase in the cost of loans for businesses by following two paths: the dynamics of the bond markets, whereby expectations of a rise in consumer prices reduce the real return expected from the investment and the demand for more monetary returns. high that compensate for it; and through the Fed's possible decisions to raise interest rates to prevent further price hikes. Whatever the path followed, the increase in the cost of loans can cause a reduction in profits, and therefore in share prices.

Dollar

The effect of a price increase on the dollar rate is more uncertain than it has on bonds and stocks. Inflation, on the one hand, reduces the real return on any investment in dollars (bonds, shares, bank deposits ...) and therefore, via disinvestments of various kinds, its price in terms of other currencies. But if the currency market participants believe that the Fed is reacting adequately to the inflationary pressures underway, it is also possible that the price of the dollar will rise.