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Duration: 6:00

Level: Beginner

The Consumer Price Index lesson discusses where to find it, how to forecast it, how it’s influenced, and how it influences financial markets and the economy. As a result of inflation, consumers typically have to deal with budget constraints, decreased purchasing power, and challenges planning for the future. It is essential to take the CPI into account when analyzing economic trends to determine how fast or slow prices are increasing or declining.

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Study Notes:

Consumers consider the prices of goods and services before making a purchase, pricing matters. As a measure of price changes, the consumer price index compares the cost of a basket of goods and services over time. There are twelve major segments in the basket of goods and services that include food, clothing, housing, household equipment, health, transportation, recreation and others. Housing and transportation are weighted heavier in the index since they represent a greater share of household budgets. Several economic series, including collective bargaining wages, business contracts, pension payments, rent, student loans, taxes and more are adjusted for inflation-free pounds via the CPI. Since some goods and services, such as education and recreation, fluctuate in sales and prices throughout the year, the CPI is seasonally adjusted. Approximately 10,000 price observations are collected from 141 outlets in order to calculate the CPI. The numbers are released by the Office for National Statistics near the 18th day of each month within the Consumer Price Inflation data release at 7:00am London time. The Office for National Statistics publishes pricing information and a wide variety of other statistics to serve the public good.

Prices play an important role in assessing supply and demand, as well as the health of the Kingdom’s economy. In an environment where demand for goods and services surpasses supply, inflationary pressures increase as more pounds pursue fewer goods and services. Alternatively, if demand declines while supply remains constant, businesses must slash their prices in order to sell their inventory. Market watchers analyze the percent changes in consumer prices on a year-over-year basis as well as a month-over month basis. Food, energy and housing have a significant influence on the index, which is why they analyze the CPI independently from them as well. For understanding how prices are changing, it is important to watch separate parts of the CPI, as food, energy, and housing can substantially shift the index.

Accelerating consumer prices may reduce affordability and trigger longer-term inflationary pressures. Consequently, the Bank of England may tighten policy to curtail price pressures, maintain inflation expectations at a secure level and regain economic balance. When consumer prices start to decelerate or utterly fall, deflation, it can serve as an indication that the economy is lagging behind, population growth is slowing, and/or a recession is underway. Long-term declines in demand may lead to wage reductions, job losses and significant reductions in investment portfolios. Following the Great Depression of the 1930s, central banks have averted deflationary episodes, preferring slow and steady price increases to accommodate economic and population growth; the Bank of England’s inflation target is two percent, identical to many developed economies.

 

Using monetary policy as a tool to control inflation could result in dwindling demand. If rates are lifted in order to dampen inflation, the pound is likely to strengthen, which may adversely affect the nation’s trade strength as foreign buyers would have to pay more for UK exports. UK corporations may experience a reduction in their global sales and profits if the pound becomes stronger. A slump in equity and bond prices is likely to occur when the Bank of England needs to tighten monetary policy during an inflationary episode.

CPI can be forecasted by examining the money supply to determine whether there’s inflation risk resulting from an increase in the money supply absent a proportionate increase in productivity. Daily commodity prices can be used by forecasters to estimate future prices of consumer goods and services since they serve as inputs. In order to assess labor market tightness, wages, employment, and unemployment shall be considered. Increasing wages in conjunction with a tight labor market can lead to higher and stickier inflation. Finally retail sales can be used to assess the economy’s transactional flow and the intensity of demand.

As a result of inflation, consumers typically have to deal with budget constraints, decreased purchasing power, and challenges planning for the future. It is likely that a recession will occur after a period of high inflation, as central banks tighten monetary policy to dimmish it. It is essential to take the CPI into account when analyzing economic trends to determine how fast or slow prices are increasing or declining.

Recent consumer price index report

Consumer price index explained


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