Inflation and CPI

Susan Jung |

Inflation continues to cause concerns for the Federal Reserve as well as markets. Recent data suggest the inflation pace is beginning to slow as the Federal Reserve raises rates. With oil prices dropping and supply chain pressures beginning to ease, we expect inflation to moderate (though it will likely be at higher-than-average levels.)

The Consumer Price Index (CPI) usually is what is quoted as it measures a real impact on people and consumers. The CPI is one of the data points that we watch carefully as we manage assets.

We continue to adjust portfolios based on our view that inflation will be higher than normal. For a clearer description of CPI, please see excerpts from the article below.


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“As the prices of many goods and services continue to skyrocket, there’s been a ton of media coverage on the subject of inflation. In July, the year-over-year inflation rate was a whopping 8.5%, as measured by the Consumer Price Index, or CPI.

Most news coverage references CPI as the main indicator as to how bad inflation is  — but some people are feeling the effects of inflation differently than others. So, what exactly is the CPI, and how does it calculate the rate of inflation? Below, Select takes a closer look at how the Consumer Price Index measures the impact of inflation on everyday consumers.

What is the Consumer Price Index (CPI)?

Let’s start with some basics. First of all, inflation is defined as the broad rise of prices in goods and services in the economy, and economists use different indices — such as the Consumer Price Index and the Personal Consumption Expenditure price index, or PCE price index — to measure it.

In other words, think of these indices as a representative basket of goods and services that the average consumer purchases, says Michael Gapen, head of U.S. economics research at Bank of America.

The Federal Reserve System’s preferred index for measuring inflation is called the Core PCE price index and is generally better at measuring the effects of inflation throughout the economy than the Consumer Price Index. Unlike the PCE price index, which includes food and energy, the Core PCE price index strips out food and energy prices since those categories tend to be more volatile. 

The CPI, on the other hand, is useful since it can be used to measure how households are being directly impacted by inflation. 

The U.S. Bureau of Labor Statistics calculates the Consumer Price Index by collecting information on the price of goods and services such as food, new and used cars, shelter, clothing and gasoline, from more than 22,000 retailers and 6,000 housing units in 75 urban areas. The CPI is then used to measure the change in prices of goods and services that the average urban consumer buys.”

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