Consumer Price Index (CPI), Interest Rate, and Stock Price Forecast

 

Price of food



What is CPI?

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.


Key points about CPI include:


It measures the overall change in consumer prices based on a representative basket of goods and services over time.

It is the most widely used measure of inflation, closely followed by policymakers, financial markets, businesses, and consumers.

The CPI is based on about 80,000 price quotes collected monthly from some 23,000 retail and service establishments as well as 50,000 rental housing units.

Housing rents are used to estimate the change in shelter costs including owner-occupied housing that accounts for about a third of the CPI.

The CPI is a crucial tool for economic analysis and policy-making, and it’s also used to adjust pensions and salaries for changes in the cost of living


CPI for December, 2023

The Consumer Price Index (CPI) for December 2023 rose by 0.3% compared to the previous month. On an annual basis, from December 2022 to December 2023, the CPI increased by 3.4%. This is a decrease of 3.1 percentage points from the 6.5% inflation rate in December 2022.

Core inflation, which excludes volatile food and energy prices, was reported at 3.9% for the year, down 1.8 points from its 12-month rate of 5.7% in December 2022.

These figures indicate a significant disinflationary trend compared to the previous year. Despite this, real hourly wages of private-sector workers rose slightly in December 2023 (up 0.1 percent), were up 0.8 percent over the past year, and have accelerated in recent months, up 2.5 percent annualized over the past three months.




Interest rate impact and stock price forecasts due to difference between CPI forecast and actual figures

The Consumer Price Index (CPI) for December 2023 was reported to have increased by 0.3%. This was higher than the estimated increase of 0.2%. On an annual basis, the CPI for 2023 closed at 3.4%, which was also higher than the estimated 3.2%.

The difference between the estimated and actual CPI can be attributed to various factors. One significant factor was the rise in shelter costs, which accounted for more than half of the core CPI increase. On an annual basis, shelter costs increased by 6.2%, contributing to about two-thirds of the rise in inflation.

As for the impact on interest rates, the Federal Reserve held its key borrowing rate steady for the third straight meeting in December 2023. Despite the higher-than-expected inflation readings, futures traders continued to assign a strong possibility that the Fed would start cutting interest rates in March. This is because interest rates are the primary tool used by central banks to manage inflation. When inflation is high, central banks may raise interest rates to slow down the economy and reduce inflation. Conversely, when inflation is low, central banks may lower interest rates to stimulate the economy.

In summary, the actual CPI for 2023 was higher than estimated, and this discrepancy can influence decisions on interest rates. The Federal Reserve may adjust interest rates based on inflation data to manage economic growth and stabilit. In general, if the CPI is measured higher than expected, it could raise interest rates or delay the timing of rate cuts. Also, in those cases, the stock price tends to go down.





Sources

https://www.investopedia.com/terms/c/consumerpriceindex.asp

https://www.whitehouse.gov/cea/written-materials/2024/01/11/december-2023-cpi-report/

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