Let’s talk the CPI, shall we?
Introduction
As Sunday rolls around again, we’re bringing you some fresh content. And in light of this week’s news, we figured it would be wise to take a dive into the CPI and its importance.
We always try and stay current on our pieces that fit in with the trends of crypto and DeFi. So let’s have it with the CPI.
So, what is it?
This three-letter acronym can move the markets right now more than earnings or any other common factors. This is because the CPI stands for Consumer Price Index and according to the U.S Bureau of Labor Statistic: “The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.”
Who uses the CPI?
A lot of attention at the minute is centered around the Fed’s use of the CPI and although there is an important link there, the Fed is not the singular intended target that is ultimately affected by CPI data.
The CPI is used for all sorts of benchmarking including eligibility levels for government assistance, federal tax brackets, federally-mandated cost of living increases, private sector wage and salary increases, and consumer and commercial rent escalations. Given the wide range of sources relying on the CPI, it impacts almost everyone.
To tie that into the current macro picture, the Fed uses the CPI number to gauge how fast inflation is rising or falling. If inflation exceeds the expected CPI numbers, then it wouldn’t be a far grasp to assume the Fed will continue to raise rates in hopes of cooling the economy and tapering inflation. On the flip side, what most of us hope for is that the CPI index shows that inflation is cooling down. This means the Fed is less likely to raise interest rates and will give some stability and a forward outlook to the markets.
Between the impacts that the CPI has on wages, taxes, etc, the Fed will likely base their trend on the CPI. As a prudent investor, it is important to tune into the markets leading into the CPI and to gauge the market sentiment following the CPI.
How the CPI is calculated
This might seem like a lot of jargon and randomness to determine a very impactful number. Let’s break down how the CPI comes up with its data.
According to the BLS website, the CPI is created from:
- A geographic sample, which is a set of areas where prices will be collected;
- A survey of consumer expenditures to create and appropriately weigh a market basket of goods and services to be priced and to create a sample of outlets in which prices are collected
- Samples of prices for commodities, services, and housing.
One might wonder who is it that is being surveyed by the CPI and if these numbers can be manipulated.
It’s always questionable to trust any centralized source but here is how the Bureau of Labor Statistics (BLS) defines its target population: “All Urban Consumers (CPI-U population) and Urban Wage Earners and Clerical Workers (CPI-W population). Both the CPI-U and the Chained CPI (C-CPI-U) use the CPI-U population.
“The CPI-U population constitutes about 93 percent of the U.S. population, and covers households in all areas of the United States, specifically, all urban households in Core-Based Statistical Areas (CBSAs) and in urban places of 10,000 inhabitants or more.
“Not covered are people living in rural nonmetropolitan areas, in farm households, on military installations, in religious communities, and in institutions such as prisons and mental hospitals.
“The CPI-W population is a subset of the CPI-U population. The CPI-W consists of all CPI-U population households in which at least one of the members has been employed for 37 weeks or more in an eligible occupation and for which 50 percent or more of the household income must come from wage earnings associated with an eligible occupation. Eligible occupations include clerical workers, sales workers, protective and other service workers, laborers, and construction workers.
“The CPI-W population excludes households of professional and salaried workers, part-time workers, the self-employed, and the unemployed, along with households with no one in the labor force, such as those of retirees. The CPI-W share of the total U.S. population has diminished over the years and is now about 29 percent of the total U.S. population.”
Phew, take a breath. We understand how that’s a lot of information to cover, but it is important to understand who the CPI is considering to base your own reliance on the information.
Conclusion
To draw everything together, the CPI is an important number as it impacts almost everyone between taxes, wages, etc. However, it is even more important in these macro times as the Fed is closely watching the CPI prints and the markets are closely watching the Fed.
Not having a good understanding of how the CPI is calculated, whom it impacts and what big decision-makers use it would be a detriment to any investor and overall has a big impact on macro movements of cryptocurrencies.
Tune into the TG to discuss the CPI, any macro topics, or anything else that might come to mind.
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