What is CPI (Consumer Price Index) and why is it important for markets?

Inflation is among the most watched economic series currently. No surprise that the attention of traders and investors is riveted on CPI (Consumer Price Index) because this is one of the most main measures of US inflation and deflation.

A country’s CPI tracks the prices of everyday goods and services that households buy. This covers areas including food, clothing, transport and leisure spending. By averaging out price changes across a basket of these goods, economists can work out how prices are rising or falling and how this affects the cost of living.

However, for most, it is a clear signal about the state of the country’s economy, which is the main driver for monetary policy – raising or lowering the interest rate.

Why is the Consumer Price Index important?

Governments and central banks use the CPI and other indices to make economic decisions.

Key among these is whether to raise or lower interest rates. Higher interest rates make borrowing money more expensive and are designed to push down consumer spending – and, in turn, inflation. Lower interest rates work the other way and are designed to encourage consumer spending, to keep inflation in line with a country’s target.

Accordingly, such monetary policy changes based on CPI data could cause increased volatility for the following assets:

✅ $US Dollar

✅ $GOLD​​

✅ $US Stocks (Dow Jones, Nasdaq, SP500 and others)

What to expect from the upcoming CPI?

The forecast for the October CPI is estimated +0.6 – 0.7% month-on-month, compared to a +0.3% forecast for September CPI, with core CPI at +0.5% for both September and October.

These are not encouraging figures. If core inflation is at 0.5% month-on-month, if sustained, that translates to over 6% year-on-year inflation. The Fed’s target is 2%.

CPI Median in the United States increased to 6.70 percent in August from 6.27 percent in July 2022, according to the Federal Reserve Bank of Cleveland.

If upcoming inflation data continues to run hot as we’ve seen recently, then it may prompt a reaction from the Fed. Yes, the Fed are already expected to hike at their upcoming November and December meetings, but maybe the increases are larger, or they extend into 2023. Either scenario would be a worry.

The market’s reaction is less clear, in part because fear is relatively high currently, and we are in a bear market. The market isn’t too optimistic. A recession is a real possibility. It remains to be seen what is priced into market expectations if these CPI inflation forecasts prove reasonably accurate.

Nevertheless, we can assume that the higher CPI rate than anticipated, it signals higher inflation, and the USD might increase in value. However, this could create pressure on the stock market and stocks of major companies in particular.

Conversely, if the US core print comes in below minimum expectations, then that should support stocks, weaken the USD, and lift gold and silver. That would likely be the best tradable outcome as well, since it would be counter to the reaction post the Non-farm payroll.

Be prepared for higher volatility.

Summary

• US CPI sets the stage for Fed’s November hike.
• The forecast for the October CPI is estimated +0.6 – 0.7% month-on-month.
• The higher CPI rate than anticipated, it signals higher inflation, and the USD might increase in value.
• If the US core print comes in below minimum expectations, then that should support stocks, weaken the USD, and lift gold and silver.