Consumer Price Index, which is used extensively to recognize the periods of inflation, is an index of prices that measures the changes in the cost of basic products and services, including housing materials, electricity, food, and transportation, over a certain period of time which is, generally, one month.
Consumer Price Index(CPI)'s offerings:
- Consumer Price Index gives the measurement of price level of any organization or
government.
- It keeps track on the escalation of prices of the common goods.
- Consumer Price Index depicts the monthly variation of prices over a complete year.
- Employers often use the Consumer Price Index to get the idea about the increment of their employees i.e, the percentage of increment that can be offered.
Interpretation of Consumer Price Index:
While measuring the Consumer Price Index a predefined and fixed amount of goods and services is taken into account. The shift of price for every individual good in the predefined collection of goods is calculated and then by taking the mean of all of them the Consumer Price Index is computed. Goods are weighed in accordance with their importance in the market. The average is taken over a base period which is one month. Bond markets do not want the escalation of the consumer price index. Consumer Price Index also covers imported goods.
Drawback of the computation process:
Since at the time of calculation a predefined amount of goods or services is taken, that's why it does not
allow the change in consumption pattern. Consumption pattern can change due to the enlistment of new products in the market.
Possible effects of Consumer Price Index on the market:
- Interest Rates: If the inflation flies more than that of expectation, then it will make the bond price down, and interns, the interest rate will increase.
- Stock Prices: If the consumer price index increases hugely, then the inflation rate will also rise, and then it will effect the stockholders.
- Exchange Rates: It can effect the exchange rates because high inflation means high market price which will freeze the market competition.
- Effect on the investors: Before investing, investors should aware of the fact that whether their investments are greater than the annual rate of inflation or not.