Understanding the CPI Report: What is it and Why is it in LinkedIn News Every Few Months?

For those new to the world of economics and finance, the Consumer Price Index (CPI) report from the U.S. Bureau of Labor Statistics (BLS) might seem like just another set of numbers. In fact, before Covid-19 many retail traders didn’t even know it existed. However, this report is a crucial tool for understanding inflation and its impact on our daily lives. In this article, I’ll break down what the CPI report is, why it matters, and how it affects you.

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What is the CPI Report?

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The CPI report measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Simply put, it tracks the cost of living. The market basket includes items like food, clothing, shelter, transportation, and medical care, among others.

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Why is the CPI Important and why does it always show up in LinkedIn News?

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Measuring Inflation: The CPI is a primary indicator of inflation. Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. When inflation is high, your money doesn’t go as far, which can affect everything from grocery bills to video games.

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Economic Policy: Policymakers, including the Federal Reserve, use the CPI to make decisions about interest rates and other economic policies. For instance, if inflation is rising too quickly, the Federal Reserve might increase interest rates to cool down the economy. This particular point is why the stock market reacts so strongly to the CPI report.

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Cost of Living Adjustments: The CPI is often used to adjust income payments for individuals. This includes Social Security benefits, tax brackets, and wages. By tying these payments to the CPI, they can keep up with the rising cost of living.

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Business Planning: Companies use CPI data to make informed decisions about pricing, wages, and investment strategies. Understanding inflation trends helps businesses remain competitive and profitable.

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How Does the CPI Affect You?

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Everyday Expenses: As prices for goods and services rise, you may notice your budget feeling tighter. Monitoring the CPI can help you understand why your money isn’t stretching as far as it used to.

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Savings and Investments: Inflation affects the real value of your savings and investments. For example, if your investments don’t grow at a rate that matches or exceeds inflation, you might be losing purchasing power over time. For example, US Inflation rate for 2023 through 2024 is anywhere from 3% to almost 5%. Meaning if you have stocks or a savings fund and the money is not growing at a rate at least equal to inflation. The value of your money goes down.

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Income Adjustments: If your wages or benefits are tied to the CPI, you might see periodic increases to help maintain your standard of living in the face of rising prices. Common practice is for 2% annual raises at companies. Traditionally this number is used due to inflation rates in the US hovering around 2% for prolonged periods of time. Inflation staying at that rate is not as common in recent times!

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Closing thoughts

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The CPI report from the U.S. Bureau of Labor Statistics is more than just a monthly release of numbers. It’s a vital tool for understanding economic health, making informed decisions, and planning for the future. By keeping an eye on the CPI, even beginners can gain valuable insights into the economic forces that shape our lives. A low CPI in the current market will usually mean a great boon in the stock market the following day. A high CPI will lead to a large sell off and a lot of talk around interest rates and a recession.

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