A large number of savvy investors use the Consumer Price Index or CPI to monitor the United States economy, and subsequently make investment decisions on the basis of its changes. As Kavan Choksi mentions, CPI is a vital gauge of United States prices. It provides a monthly indication of general price movements or inflation. The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) releases the CPI data every month.
Kavan Choksi underlines why investors keep an eye on the Consumer Price Index
As per the BLS, The CPI measures inflation as experienced by consumers in their daily living expenses. This index tends to track price changes paid for a paid for a representative consumer goods and services basket over a specific period of time. This basket represents the spending habits of the majority of urban consumers. It comprises of a wide array of items like food, medical care, transportation services and more. The CPI serves as a dependable measure of deflation or inflation by capturing price changes for each item in this basket. It provides an overview of how much it is likely to cost for consumers to maintain their standard of living. It also acts as an important tool for identifying periods of economic inflation or deflation.
The monthly CPI report contains two important inflation numbers:
- Month-over-month price changes: This figure shows how prices have changed relative to the prices of the previous month. For instance, a report might show how August’s prices changed relative to July’s prices.
- Year-over-year price changes: This figure shows how prices have changed relative to the same month in the previous year. For instance, a report might show how the September 2024 prices compare to the prices of September 2023.
Typically, the year-over-year figure is what the majority of people use when discussing inflation. This annualized number tends to provide more context while thinking about prices. It provides up a full year’s comparison, as opposed to a month-over-month comparison.
As per Kavan Choksi, the CPI report is extensively watched as inflation plays a huge role in economic decision-making. Wall Street traders, major banks, and corporations commonly keep an eye on the CPI report. Individual investors may also considerably benefit by examining consumer price trends. After all, high inflation rates may threaten economic growth, as well as hit the prices of financial assets like stocks and bonds.
Investors make use of the CPI with the goal of curbing inflation risks with securities that benefit from it. Even though inflation does hamper majority of the fixed-income investments by eroding the present value of future interest payments, it is not generally an issue for Treasury Inflation-Protected Securities (TIPS). TIPs are sold by the United States government and adjust their coupon payments based on changes in the CPI. Experienced and savvy investors wanting to profit from inflation or hedge it may choose to purchase an inflation swap, which implies to derivatives contract providing for payments based on changes in the CPI. The pricing of these contracts can also provide a better understanding of the consensus inflation expectations.