CPI measures the average change over time in prices paid by urban consumers for a market basket of goods and services. Published monthly by the Bureau of Labor Statistics (BLS), it is the most widely used inflation indicator and a primary input for Federal Reserve policy decisions.
How It's Calculated
The BLS tracks prices of approximately 80,000 items across 23,000 retail establishments monthly. The basket is weighted by consumer spending patterns, with Shelter (~36%), Food (~13%), and Transportation (~16%) as the largest components.
Key Variants
Why Markets Care
A Core CPI MoM reading of 0.3% or higher is considered 'hot' and pushes rate-cut expectations further out, typically causing stocks to sell off and bond yields to spike. A 0.1% or lower reading is 'cool' and triggers risk-on rallies.
Historical Context
U.S. CPI hit 9.1% YoY in June 2022 β the highest since November 1981 (BLS). The Fed responded with the fastest rate-hiking cycle in 40 years, from 0% to 5.25-5.50%. CPI averaged 1.7% during the 2010-2019 decade, persistently below the 2% target.
Limitations
CPI's shelter component lags real-time rents by 12-18 months due to its survey methodology. This lag caused CPI to continue showing elevated readings in 2023 even as new lease rents were falling.