Along with the employment report, the Consumer Price Index (CPI) is another one of those red-hot economic indicators that is carefully dissected by the financial markets. It’s fairly obvious why it gets so much attention. Inflation touches everyone. It determines how much consumers pay for goods and services, affects the cost of doing business, causes havoc with personal and corporate investments, and influences the quality of life for retirees. Moreover, the outlook for inflation helps set labor contracts and government fiscal policy.
Changes in the CPI also alter the benefits of 55 million Social Security recipients and 45 million people on food stamps. Landlords take inflation forecasts into account to lock in future hikes in rental contracts. Judges even refer to the CPI to compute alimony and child-support payments. In short, the effects of inflation are ubiquitous. No one can escape its reach.
Where it gets a little tricky is in how to measure inflation. No less than half a dozen economic indicators purport to gauge changes in prices. They include the personal consumption expenditures price index, producer prices, import prices, employment cost index, unit labor costs, and GDP deflator. Each has its strengths and weaknesses. For example, the GDP inflation indexes cover a much broader range of items than the CPI, but the former is released only quarterly, whereas the CPI is published monthly. And while the producer price index is a monthly inflation measure, it reflects price changes mostly at the wholesale business level and does not include the cost of most services. In contrast, more than half of the CPI consists of services, which is the fastest-growing part of the economy. This makes the CPI more relevant to consumers and workers.