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Consumer Price Index

Consumer price index is usually referred to as CPI. Another abbreviation is Core CPI which is used for the so called core index excluding energy and food data. CPI tracks the average change in the prices of goods and services in a fixed basket, i.e inflation of consumer prices for a specific basket. It is a key indicator of inflation in the country. A basket is measured in the following way: CPI = [ 0.38 * (Housing prices2 - Housing prices1/ Housing prices1) + 0.19 * (Food chng.) + 0.08 (Fuel chng.) + 0.07* (auto chng.) + 0.28*others. However, the headline figures are the percentage change in the index in monthly and annual terms (CPI2 - CPI1).

Main categories:

1. Food and beverages

2. Accommodation

3. Clothes and Services

4. Transportation

5. Medical service

6. Entertainment

7. Other goods and services

For example:

1. Food, drink, tobacco

2. Clothing, shoes

3. Rents & energy - Of which: rents energy excl. fuel

4. Furniture, household goods

5. Health and body care goods

6. Traffic and news transmission

7. Education, leisure goods

8. Personal equipment, others

The report is released for the previous month by the Bureau of Labor Statistics, a unit of the Department of Labor, at 08.30 am Washington DC time in the second half of the month following the reporting month. The data on consumer prices is the last report, characterizing the inflationary component in different branches of economy after the export and import pricing data and industrial prices report.

Correlation with other indicators. The CPI has an impact on long-term evaluation of purchasing power parity countrywide as well as on the central bank monetary policy setting the interest rates. An increase in the CPI usually leads to reduction in the genuine demand and retail sales volume in the mid term. In the short term, vice versa, a rise in prices reflects a high consumer activity. Such indicators as money supply (M2), industrial and import prices have influence on this index. The CPI is analyzed together with the PPI (Producer Price Index). If the economy develops under normal conditions, then the CPI and PPI advancement may lead to the main interest rates enhance in the country. This, in its turn, will be the result of the US dollar rate increase, as the force of attraction to deposit money to the currency with larger interest rate escalates.

Peculiarities of the CPI behaviour. The major difference in the CPI structure is between goods and services. Goods make up nearly to 44% of the index and services – 56%. There are two rules for consideration of inflationary trends of two sectors.

The inflation in the goods sector is more changeable, than the inflation in the services one. The main reason is that goods, or tradable sector, depend heavily on food and energy prices. These two components occupy nearly half of the commodity element and price changes are especially significant.

The inflation of the services sector is less changeable during the trade cycle, and is behind the inflation of goods. The highs and lows of services prices are in arrears of price fluctuations in the goods sector for 6 months on average.

When the CPI is published, the market initially draws attention to month-on-month changes and to basic elements which give the highest inflation rate (prices on energy and food). The annualized CPI figures cause less interest. As soon as the market gets the information about the core inflation as well as statistics on food and energy, the attention will turn to any unexpected changes in these areas. It is necessary to pay attention to:

Inflation changes in separate categories, as they cause changes on the financial markets. The more noticeable changes are, the more significant they are.

The behavior of any category with inflationary movements that may be the most influential and unexpected. When unpredictable changes come to the sector for which they are unusual then they are less powerful, than price motions in the sector of the core inflation. It is necessary to consider that separate components are interrelated, for example, energy is not summarily calculated, as it is included in many other services and tradable components.

You should first of all remember that inflation has its own cycle which is behind the GDP growth cycle. That is why the review of average monthly changes in the CPI may misinform, as they are too similar at each period of the trade cycle. This also refers to the core CPI. The core CPI value shows average and more correct data on the consumer prices cycle, than the total CPI. Historically high and low levels of the core CPI frequently correspond to recessions and revivals, and only in two out of ten cases they do not correspond to norms in the recovery phase.

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