Among the different indicators that economists, statesmen, investors and, finally, the population as a whole, use to make decisions, one of the most important is the Consumer Price Index (CPI), which measures the variation in prices of certain goods and services of vital importance for measuring the development of the economy of a country or region. This index, with more or less similar criteria, is produced in almost every country in the world. In the case of the United States, the dissemination of the Consumer Price Index is the responsibility of the Bureau of Labor Statistics.
Let’s get to know a little more about the CPI
The Consumer Price Index takes, for its elaboration, a set of mass consumption goods and services, with which it forms a basket and analyzes the evolution of the prices of each one of those goods and services. It establishes an average of weighted prices, this due to the fact that not all the products that make up the basket have the same impact.
The CPI is the indicator par excellence that allows us to know the level of inflation or deflation of the country, and its level of economic activity. The monetary authorities of the Federal Reserve of the United States pay much attention to the CPI since their decisions have it as one of their fundamental indicators. The FED has established the behavior of the CPI as one of the essential points for intervening on interest rates.
If the Consumer Price Index rises above 2% annually, the Federal Reserve considers that the conditions to increase the cost of credit -that is, to increase interest rates– have begun to exist, in order to prevent, in this way, by the hand of money withdrawal from the market, that inflation continues to rise. It is important to note that it is not the only indicator it takes to modify rates, as it also takes into account the evolution of the labor market and the unemployment rate.
How does the Consumer Price Index make its measures?
Let’s say, first of all, that the Bureau of Labor Statistics offers 2 types of CPIs. The first is the CPI-W or Consumer Price Index for urban wage earners and public workers. The other, called CPI-U, is the Consumer Price Index for Urban Consumers. The latter is much broader than the CPI-W, and therefore the most consulted, as it represents 89% of the population.
The basket of goods and services is made up of food and beverages, housing, clothing, transportation, health and medical care, recreation, education, and communication. It also includes other minor goods and services. But all of them make up the most regular and popular use by the population as a whole.
Why is the CPI important?
Although we have already pointed out several reasons, let’s say that, in the United States, the indicators that speak of inflation reflect the level of economic activity in the country. In other countries, especially the so-called peripheral ones, inflation acts as a strong distortion factor of the economy and its variation, far from being linked to economic activity, has a very strong relationship with the movements of the local currency with respect to the dollar.
The U.S. Bureau of Labor Statistics produces the CPI monthly and presents reports broken down by regions: Northeast, Midwest, South and West and, in turn, offers indices broken down into the most important metropolitan areas of the country: Chicago-Gary-Kenosha, Los Angeles-Riverside-Orange County and New York-Northern NJ-Long Island.
In conclusion, the Consumer Price Index is an important indicator for which we are all awaiting its publication.