Fundamental statistics can have a relatively serious impact on stock, commodity and currency markets. And let it carry a local short-term nature (the market plays back a few hours or even faster for a similar publication of statistics), for scalpers it is a possibility of earning, for novice traders it is a signal to temporarily stop trading, for other traders it is a source of information for more detailed analysis.
What is CPI
CPI (Country Consumer Price Index) is an index calculated for a fixed group of goods that make up the consumer basket of the average person in a country for a fixed period of time. Each country has its own approach to calculating the indicator, although the general procedure for generating statistics is recommended by the IMF, EBRD and the UN. For example, in the United States, the cost is based on about 300 goods and services in 85 major cities. In the UK – about 350, in Germany – about 475 goods. In Russia, the method of calculation is approved by law (although it is regularly revised), the consumer basket includes just over 150 goods and services.
Comparison of the consumer price index of the country for the current year is relative to the base (that is, based on the benchmark, where prices were most stable).
Problems of calculation and interpretation of the indicator:
- The index value is very approximate, as you can argue for a long time about the composition of the consumer basket, the volume of goods and which year and by what criteria to call the base one.
- There is no uniform calculation method. If the basis of the consumer basket will include the minimum vital quantity of goods, the indicator value will be less and the increase in wages (associated with the CPI indicator) will not compensate for the real increase in inflation.
- The state can artificially adjust the index. For example, setting the price bar for individual products or creating artificial demand for state reserves. The indicator will not fully reflect the real state of the economy.
- The indicator only shows a quantitative change that does not take into account the change in quality. For example, if the base year for 2018 is 2010, then the computer that is taken into account in the indicator will have different technical characteristics (for 8 years the technologists have gone far ahead).
The lack of a unified approach to the calculation of the indicator and the error of statistics (prices for goods are different depending on the region) led to the creation of several methods for determining the indicator:
- Low Index. The technique was developed in 1823 and, despite the changes made, it still exists. Allows you to rate a cart from any number of products. Product sets can be represented in both arithmetic and geometric mean terms.
- The Leispers Index and the Paasche Index. They are used less frequently and only in cases when you need to specify the amount of actual expenses of business entities.
Compared to the discount rate and NFP, it has a far less significant impact on the markets. But he refers to the base. For example, on its basis, recalculation of wages or social benefits is carried out. In the United States, the indicator is published on the 15th day once a month.
An increase in indicator values suggests that rising prices reduce purchasing power and accelerate inflation. Therefore, for developing countries, this is rather a negative trend. For developed countries, the situation is different. For example, in Japan, the country’s leadership, on the contrary, is trying to accelerate inflation, and here the growth of the indicator will be viewed by investors as a positive signal. A situation where the CPI is below 0 means deflation.