The most widely followed monthly indicator of inflation is the consumer price index. This indicator measures the change in the cost of goods and services purchased by consumers and is considered a cost-of-living index. The CPI has evolved over time as consumer expenditures have changed. Commodities only make up 40 percent of the index, while the remaining 60 percent are services. Increases in Social Security payments and, many times, labor contracts are tied to the CPI.
On Thursday, the CPI for the month of April was released, showing a gain of 0.3 percent over the prior month, with energy prices partly to blame for the increase. Inflation readings vary from month to month, and the large increase from March to April is not reflective of the general price increases seen over the past year. In fact, the CPI has only gained 2.0 percent over the past 12 months.
It is said that the Federal Reserve follows the “core” inflation, which effectively excludes the cost of food and energy from the formula.
Although I recognize the price of food and fuel can be volatile, this makes little sense to me, since what could be more core to the average consumer’s monthly needs than food and energy to heat their home or fill their gas tank? Food and energy make up only one-fifth of the CPI.
The CPI matters to us as investors because inflation influences the markets. Lower inflation typically translates into lower interest rates and higher prices in the bond market, like we are seeing today.