Consumer Price Index
The Consumer Price Index is a monthly measure of the
average price level of a fixed basket of common goods and services,
including food, housing and energy, purchased by consumers. The
monthly changes in the CPI represent the rate of inflation which is a
general increase in the prices of goods and services.
The Consumer Price Index is the most widely followed
indicator of inflation. It is the gauge by which we can measure the
cost of living and the CPI is also known as a cost of living index.
How does Consumer Price Index impact the financial markets?
The key to understanding how the Consumer Price Index,
and other similar data, influences the futures markets is to
understand the relationship between inflation and interest rates (bond
prices). The knowledge of what inflation is, and how it influences
the futures markets can give the futures trader an edge over the other
traders out there. By tracking the trends in inflation, whether high
or low, rising or falling, investors can anticipate how different types of
investments will perform.
As the rate of inflation changes, or there is just the
expectation of an inflationary change, the futures markets adjust interest
rates, and bond prices accordingly. This change can effect stocks, bonds,
commodities and especially your open futures positions, sometimes with less
than spectacular results.
If you are a bank, you have to know how much interest to
charge over the lending period and this depends on the rate of inflation.
As the banker you are aware that when you get your money back it will not
have the same purchasing power as when you lent it out, therefore you have
to charge a suitable level of interest to maintain that purchasing power, as
well as make a profit. In a third world country where prices can
double every few months the bank would have to charge 400% interest per
year. In the United States where the Consumer Price Index shows the
level of inflation is around 2% you would only have to charge 2% interest
per year to keep up with inflation. This is a simple example of how
interest rates can be set on everything from your mortgage and credit cards
to Treasury bonds and T-bills.
By tracking the trend of the Consumer Price Index, and the
other inflationary indexes such as the
Producer Price Index, a futures trader can anticipate how different
types of futures contracts and futures markets will perform.
More Economic
Indicators and Reports:
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