Let's continue with CPI (inflation)
After finish this one we will combine those three and make some variations.
You probably know until now,why inflation matters.
Inflation affect everyone.
Investors most time looking to hedge themsevles against inflation,because inflation is two headed dragon.
Inflation shows how much consumers pays for good and services,affects the cost of doign business,causes havoc with personal and corporate investments , and infulences the quality of live for retirees.
Government use inflation outlook to set labor contracts and fiscal policy and so on ..
Where it gets a little tricky is how to measure inflation. No less than half a dozen economic indicators purport to gauge changes in prices.
They include the personal consumption expenditures price index, producer prices, import prices, employment cost index, unit labor costs, and the GDP deflator. Each has its strengths and weaknesses. For example, the GDP inflation indices cover a much broader range of items than the CPI, but the former is released only quarterly, whereas the CPI is published monthly. And while the producer price index is a monthly inflation measure, it reflects price changes mostly at the wholesale business level and does not include the cost of services. In contrast, more than half of the CPI consists of services which is the fastest-growing part of the economy.
This makes the CPI more relevant to consumers and workers.
What the CPI real is?how it is computed,what it include ?
CPI measures the average change in retail prices over time for a basket consisting of more than 200 categories of goods and services.
Then whole that is diveded by categories,8 categories (that I know).
Housing,Food and Beverages,Transportation,Mediacal Care,Apparel,Recreation ,Education and Communication and other Goods and Services.
Each group is given a weight that represents its importance in the CPI calculation.
The weights are determined by surveying thousands of families and individuals about what they actually bought in year.
Every two years, these weights get revised to adjust for people’s changing tastes and priorities.
In 2001 this basket and weight in the CPi was :
As you can see from the list, the biggest single component in the CPI is housing with a 42% share (or weight). Transportation costs make up nearly 17% of the index, and medical care just above 6%. When all the figures are compiled, the BLS puts out a CPI index
number that represents the change in the total cost of these items during the latest month.
The advantage of using an index number as opposed to a dollar figure is that it enables you to get a historical perspective of how inflation has performed over different time frames.
So what’s so bad about inflation?
Inflation creates a climate of instability and uncertainty and invites distortions in the economy. Sure, firms would love to see their revenues increase, but they prefer to accomplish this by selling more products, rather than by simply raising prices. Furthermore, companies can suffer like anyone else from inflation, especially if their own suppliers decide to bump up prices. Company employees also demand higher pay to offset the increased cost of living due to inflation. In addition, while Congress might quietly admit that inflation brings in more tax revenues, elected officials also know that rising inflation can anger voters who see their purchasing power eroding. That can cause them to take out their frustrations on Election Day. So is inflation harmful? Absolutely
The only time inflation is deliberately sought is when an economy comes face to face with the threat of deflation, a phenomenon where prices across the board spiral downward. To be sure, falling prices initially sound great to shoppers. But make no mistake—deflation can be as destructive to an economy as inflation. Tumbling prices slash corporate profits, which, in turn, can lead to job layoffs. Higher unemployment reduces household income, and that causes a retrenchment in consumer spending. As more consumers back away from shopping, prices drop further and companies are forced to let go of additional workers. It’s a vicious cycle of an economy in utter collapse. The U.S. suffered deflation during the Great Depression. Between 1929 and 1933, the CPI dropped 24%. As in 2001 and 2002, Japan was stuck in a deflationary spiral from which it could not recover, even though interest rates dropped to essentially zero.
Its economy was unable to grow and joblessness rose toan all-time high.
Ideally, the goal of government—specifically the Federal Reserve—is to avoid both harmful inflation and deflation by pursuing policies that promote price stability. In practical terms, that means tolerating only a modest level of inflation, with prices inching up no more than 1% to 2% a year.
So, inflation extremes ,both deflation and hyperinflation are damaging for economies.
How they compute it ?
[Speaking about Bureau of Labor Statistics (BLS) and USA]
In the first three weeks of every month, agents from the Bureau of Labor Statistics (BLS)
check out stores and conduct telephone interviews with about 23,000 retail outlets and other businesses located in 87 urban areas. Prices are collected on 80,000 items and services, including eyeglasses, hamburgers, dental exams, cars, gasoline, legal fees, beer,
computers, breakfast cereal, and funeral services. Every month, the same basket of goods and services is analyzed to get a sense of how prices are behaving. Because home rental costs do not change very much, the BLS obtains new pricing information from about
50,000 housing units only every six months.
Seasonal adjustment factors are applied to all data to correct for typical variations that can occur during the year. For example, prices for oranges and other fruits typically edge higher in the winter because that’s when supplies for such foods dwindle, even
though demand remains strong.
To reduce some of the statistical noise in the inflation data and to provide a better understanding of the genuine trend in inflation, the government publishes an index known as the core-CPI, which is the CPI, but without the unstable components of food and energy.
Most economists see core-CPI as the best measure of the underlying inflation rate.
I guess this is all you have to know about inflation .
I include here impact on various markets,because it is really important to track various markets and to know impact.
Today ,global market are interconnected highly,same as the economy.
For bond market:any surprisingly jump in CPI can slash the value of bond (so yields goes up).
If for example core CPI gains more,that is even worst for bonds,because it shows that underlyng inflation rate is really on the pickup strongly.
And vice versa , bad CPI report showing little or no inflation is bullish for fixed income securities,so bonds up and yields down.
For stock market :equity investors also don't like sharp increases in the CPI, especially core-CPI, because it leads to higher bond rates (yields), which raises the cost of corporate borrowing.
While revenues
and perhaps even profits might jump in an inflationary environment, that kind of income is worth much less to shareholders, who prefer to see earnings improve from greater sales volume, not price hikes. Furthermore, the threat of inflation will almost certainly force the Central Bank to jump in and raise interest rates, which is also anathema to shareholders.
And vice versa in plunging inflation.
On currencies ,FX market (watching USD) :the effect inflation has on the dollar is less clear. As is often the case in a healthy economic expansion, rising U.S. interest rates can make the dollar attractive. But if rates surge primarily on account of growing inflation concerns, it can hurt the U.S. currency.
Higher U.S. inflation erodes the value of dollar-based investments held by foreigners, so a sustained increase in the CPI can have a negative influence on the USD.
After finish this one we will combine those three and make some variations.
You probably know until now,why inflation matters.
Inflation affect everyone.
Investors most time looking to hedge themsevles against inflation,because inflation is two headed dragon.
Inflation shows how much consumers pays for good and services,affects the cost of doign business,causes havoc with personal and corporate investments , and infulences the quality of live for retirees.
Government use inflation outlook to set labor contracts and fiscal policy and so on ..
Where it gets a little tricky is how to measure inflation. No less than half a dozen economic indicators purport to gauge changes in prices.
They include the personal consumption expenditures price index, producer prices, import prices, employment cost index, unit labor costs, and the GDP deflator. Each has its strengths and weaknesses. For example, the GDP inflation indices cover a much broader range of items than the CPI, but the former is released only quarterly, whereas the CPI is published monthly. And while the producer price index is a monthly inflation measure, it reflects price changes mostly at the wholesale business level and does not include the cost of services. In contrast, more than half of the CPI consists of services which is the fastest-growing part of the economy.
This makes the CPI more relevant to consumers and workers.
What the CPI real is?how it is computed,what it include ?
CPI measures the average change in retail prices over time for a basket consisting of more than 200 categories of goods and services.
Then whole that is diveded by categories,8 categories (that I know).
Housing,Food and Beverages,Transportation,Mediacal Care,Apparel,Recreation ,Education and Communication and other Goods and Services.
Each group is given a weight that represents its importance in the CPI calculation.
The weights are determined by surveying thousands of families and individuals about what they actually bought in year.
Every two years, these weights get revised to adjust for people’s changing tastes and priorities.
In 2001 this basket and weight in the CPi was :
As you can see from the list, the biggest single component in the CPI is housing with a 42% share (or weight). Transportation costs make up nearly 17% of the index, and medical care just above 6%. When all the figures are compiled, the BLS puts out a CPI index
number that represents the change in the total cost of these items during the latest month.
The advantage of using an index number as opposed to a dollar figure is that it enables you to get a historical perspective of how inflation has performed over different time frames.
So what’s so bad about inflation?
Inflation creates a climate of instability and uncertainty and invites distortions in the economy. Sure, firms would love to see their revenues increase, but they prefer to accomplish this by selling more products, rather than by simply raising prices. Furthermore, companies can suffer like anyone else from inflation, especially if their own suppliers decide to bump up prices. Company employees also demand higher pay to offset the increased cost of living due to inflation. In addition, while Congress might quietly admit that inflation brings in more tax revenues, elected officials also know that rising inflation can anger voters who see their purchasing power eroding. That can cause them to take out their frustrations on Election Day. So is inflation harmful? Absolutely
The only time inflation is deliberately sought is when an economy comes face to face with the threat of deflation, a phenomenon where prices across the board spiral downward. To be sure, falling prices initially sound great to shoppers. But make no mistake—deflation can be as destructive to an economy as inflation. Tumbling prices slash corporate profits, which, in turn, can lead to job layoffs. Higher unemployment reduces household income, and that causes a retrenchment in consumer spending. As more consumers back away from shopping, prices drop further and companies are forced to let go of additional workers. It’s a vicious cycle of an economy in utter collapse. The U.S. suffered deflation during the Great Depression. Between 1929 and 1933, the CPI dropped 24%. As in 2001 and 2002, Japan was stuck in a deflationary spiral from which it could not recover, even though interest rates dropped to essentially zero.
Its economy was unable to grow and joblessness rose toan all-time high.
Ideally, the goal of government—specifically the Federal Reserve—is to avoid both harmful inflation and deflation by pursuing policies that promote price stability. In practical terms, that means tolerating only a modest level of inflation, with prices inching up no more than 1% to 2% a year.
So, inflation extremes ,both deflation and hyperinflation are damaging for economies.
How they compute it ?
[Speaking about Bureau of Labor Statistics (BLS) and USA]
In the first three weeks of every month, agents from the Bureau of Labor Statistics (BLS)
check out stores and conduct telephone interviews with about 23,000 retail outlets and other businesses located in 87 urban areas. Prices are collected on 80,000 items and services, including eyeglasses, hamburgers, dental exams, cars, gasoline, legal fees, beer,
computers, breakfast cereal, and funeral services. Every month, the same basket of goods and services is analyzed to get a sense of how prices are behaving. Because home rental costs do not change very much, the BLS obtains new pricing information from about
50,000 housing units only every six months.
Seasonal adjustment factors are applied to all data to correct for typical variations that can occur during the year. For example, prices for oranges and other fruits typically edge higher in the winter because that’s when supplies for such foods dwindle, even
though demand remains strong.
To reduce some of the statistical noise in the inflation data and to provide a better understanding of the genuine trend in inflation, the government publishes an index known as the core-CPI, which is the CPI, but without the unstable components of food and energy.
Most economists see core-CPI as the best measure of the underlying inflation rate.
I guess this is all you have to know about inflation .
I include here impact on various markets,because it is really important to track various markets and to know impact.
Today ,global market are interconnected highly,same as the economy.
For bond market:any surprisingly jump in CPI can slash the value of bond (so yields goes up).
If for example core CPI gains more,that is even worst for bonds,because it shows that underlyng inflation rate is really on the pickup strongly.
And vice versa , bad CPI report showing little or no inflation is bullish for fixed income securities,so bonds up and yields down.
For stock market :equity investors also don't like sharp increases in the CPI, especially core-CPI, because it leads to higher bond rates (yields), which raises the cost of corporate borrowing.
While revenues
and perhaps even profits might jump in an inflationary environment, that kind of income is worth much less to shareholders, who prefer to see earnings improve from greater sales volume, not price hikes. Furthermore, the threat of inflation will almost certainly force the Central Bank to jump in and raise interest rates, which is also anathema to shareholders.
And vice versa in plunging inflation.
On currencies ,FX market (watching USD) :the effect inflation has on the dollar is less clear. As is often the case in a healthy economic expansion, rising U.S. interest rates can make the dollar attractive. But if rates surge primarily on account of growing inflation concerns, it can hurt the U.S. currency.
Higher U.S. inflation erodes the value of dollar-based investments held by foreigners, so a sustained increase in the CPI can have a negative influence on the USD.