Macro-economics in Crypto 3.
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On this thread, we discuss the CPI, it's meaning, why it is important and how it is calculated.
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On this thread, we discuss the CPI, it's meaning, why it is important and how it is calculated.
CPI is short for consumer price index. The CPI is one of the most used metrics of Inflation. It is a lagging indicator. Lagging indicators are economic indicators that measure the extent of change in an economic variable or factor.
They measure change after they have already happened. Do note that for this reason, lagging indicators are best used to understand what has happened in an economy during a particular period, and not what will happen in the nearest future.
By definition, the CPI is a measure of the change in the prices of a select basket of consumer goods and services.
A high CPI print connotes high prices which invariably means consumers have to spend more to get around the same amount of goods they'd have had with a lesser amount.
A low CPI print indicates a decline in the prices of goods and services and implies a stronger purchasing power for the currency. (Since a lesser amount of cash would be able to purchase an increased amount of goods/services).
As crudely explained in this tweet, this "basket of consumer goods and services" is made up of items/services the citizens purchase "the most".
Why is the CPI important ?
The CPI figure tells us if the government (and by extension the Feds) are winning the fight against inflation. High CPI prints means the final consumers get to pay more for less. (Which tells of a loss in purchasing power of the currency).
The CPI figure tells us if the government (and by extension the Feds) are winning the fight against inflation. High CPI prints means the final consumers get to pay more for less. (Which tells of a loss in purchasing power of the currency).
Since it is the job of the Feds to keep inflation at an acceptable level, CPI prints are taken into consideration in deciding strategies to tackle inflation. A high CPI print (like what we just had) could see the feds hike interest rates even further. I assume at this point...
...we all understand what hike in interest rates means for liquidity in the economy. If you do not however, read this;
The CPI figure released a few days ago has currently spurred the market's expectations of the FEDS hiking another 75bps.
How is CPI calculated ?
First, each item in the basket are accorded weights.
First, each item in the basket are accorded weights.
They are then calculated as a 'change' of current year over the base year using the formula;
The video below gives a simplistic approach to calculating CPI;
youtu.be
The video below gives a simplistic approach to calculating CPI;
youtu.be
So, to recap:
Β°The CPI captures price increases/decreases in household items.
Β°The CPI figure tells us if inflation is cooling or not.
Β°It informs the decisions of the Feds.
Β°The CPI captures price increases/decreases in household items.
Β°The CPI figure tells us if inflation is cooling or not.
Β°It informs the decisions of the Feds.
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