Definition and Importance of Consumer Price Index (CPI)

Consumer Price Index (CPI) 

• The Consumer Price Index is released monthly by the Bureau of Labor and Statistics
• It is the most widely followed indicator of inflation.  Inflation is an increase in the overall prices of goods and services.
• The CPI is a measure of the average change over time in the prices paid by urban consumers for a fixed market basket of consumer goods and services.  It is available nationally by expenditure category and by commodity and service group for all urban consumers and wage earners.
• The “Core” CPI excludes food and energy prices, which account for roughly one quarter of the broad CPI and tend to fluctuate widely.  Because of their volatility, excluding food and energy provides a truer reflection of inflationary trends.
• In addition to other factors and risks, inflation basically explains how interest rates are set on everything from auto loans to mortgages to Treasury Bills, Notes and Bonds.  As the rate of inflation and inflation expectations change, the markets will adjust interest rates accordingly.  Very similar to throwing a stone into a placid pond, the inflation effect sends ripples across stocks, bonds, commodities, and YOUR PORTFOLIO in a dramatic fashion.
• An investor who understands how indicators such as the CPI influence the markets, will benefit over those who do not.

Investors worried about high inflation, may attempt to “hedge” their portfolios by utilizing TIPs (Treasury Inflation Protected Securities), Commodities and Precious Metals, Real Estate Investment Trusts (REITs), and more recently the IQ CPI Inflation Hedged Exchange Traded Fund.

If you are concerned about inflation risks to your portfolio, have a discussion with your financial advisor or certainly feel free to email me at mfalvey@richinvest.com 

Best returns,

Matt