Understanding the Consumer Price Index
The Consumer Price Index (CPI) is a benchmark that examines the weighted average of consumer goods and services such as transportation, food, and medical care. It is calculated by averaging the monthly price changes for every goods and service being offered in the UK.
The CPI is an important measure to the UK economy; whether it’s an increase in price at your department store or rise in your salary at work, the CPI affects every UK citizen.
Why measure the Consumer Price Index?
Measuring the CPI is important in order to make the cost of living for every person manageable. Without it, the government won’t be able to adjust variables such as the minimum wage or income eligibility levels for government assistance.
In short, without the CPI, the prices of consumer goods (shoes, bags, toiletries, clothes, food, and anything else that consumers buy) may just keep rising while the income of every UK citizen remains low. The CPI is the balance that keeps harmony between the government, merchants, and consumers.
How is the CPI collected and reviewed?
Each month, data collectors contact thousands of merchants, service companies, rental houses, and hospitals in the UK to obtain price information on thousands of items. These data collectors track and measure price changes on the CPI.
Every item represents a scientifically selected sample of the prices being paid by consumers. Once the data has been consolidated, the updated CPI will be published by the Office for National Statistics.
Calculating the CPI
Although news sites typically only mention the increase of consumer goods and services on the CPI, it’s important for everyone to understand how the CPI is calculated. The CPI is measured by comparing the current month’s prices to a base year.
In this case, let’s use 2014 as the base year.
The goods and services for the base year are assigned a value. For this example, let’s use £100 as the value for the base year 2014. According to Statista’s data on UK’s CPI, the average CPI last year (2016) was 100.70. This means that you’d have to spend £100.70 in 2016 in order to purchase the same goods and services that you’ve been buying in 2014 for £100.
Currently, the Euro’s CPI consensus is at 1.3%, which is 0.1% higher than last month’s 1.2%. Based on FXCM’s economic calendar, the volatility reading is a bit high, which means that the prices of goods and services in the Eurozone may increase again in the following month.
Does the CPI affect anything else apart from the prices of goods, government assistance, and minimum wage?
Besides the price increase in stores, monthly salaries, and eligibility for government assistance, the CPI also affects traders and investors on a regular basis.
Since the CPI is basically measuring consumer trends, traders and investors also depend on its data for day trading. The CPI is taken into account several times a month so traders and investors adjust their strategies accordingly. For these people, the CPI is a key indicator for measuring inflation and changes in purchasing trends.
A high reading is seen as positive by traders, and a low reading means a potential decline to the value of the sterling.
How this can work for your household
If you want to get a good grasp on how to properly adjust your monthly budget, you can take a look at the CPI, examine the percentage increase every month and adjust your spending accordingly.
Over to you…
Have you been mystified by the CPI? Would you personally use it to budget?