Consumer Price Index (CPI)

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Posted by:individual, non-smoking, teetotaler with good health.
Why is the consumer price index (or CPI) soWhat does a higher CPI figure mean to my stocks?
important? Well, it is a quick way of determining howThe impact of CPI figures will vary from stock to
much more or less people are spending on astock and, probably more importantly, industry to
day-to-day basis, and from this figure we canindustry. A services industry might have little
determine the kinds of pressures that the economyexposure to CPI based values, whereas a
is under.manufacturer is likely to be more exposed, and
If the CPI number rises, it means that the averagetherefore their profitability and share price can be
household or consumer has less money forinfluenced by a change in these figures.
discretionary spending.It is often the unexpected numbers that have the
Longer term, it means that wages will come underbiggest influence on the market. If the market
pressure as employees find that they are living onexpects a 1% rise and the actual figure turns out to
less, and will then either request higher pays, or lookbe, say, 3% this is more likely to have an adverse
for employment opportunities elsewhere.affect. Most economic data has already been
The vicious circlefactored in before its release, but anything that
Employers too, will find that the costs of running theirgreatly varies from that expectation is going to have
business will go up. Higher operating costs, meana greater impact.
lower profit margins and lower margins mean thatSo we can see that it's not just the figure or
they will have less capacity to meet the higher wagepercentage, but rather the variation away from the
demands employees are now requiring.expectation that will cause a share price to rise or fall.
Higher costs equal lower profits, and that meansTo summarise, the market does not like
lower share prices. To avoid posting lower profits,unexpectedly high rates of inflation as this causes
businesses must then consider passing these higheruncertainty to companies profit outlooks. The inflation
costs to their customers, which of course will tricklehowever will affect each industry in different ways.
down to CPI numbers. Potentially a cycle could occurHow is it calculated?
where higher prices cause higher costs and higherCPI by definition is the measurement of the price
prices again.change in a basket of consumer goods. The actual
So we can see why world central banks keep such agoods within this basket are divided into 11
close eye on the rate of inflation.categories:alcohol and tobaccoclothing and
Winners and losersfootwearhousinghousehold furnishingssupplies and
Some businesses may benefit from a CPI rise. Theyucation andmiscellaneous
can use this as justification for putting up pricesCPI is simply the measurement of change in the
either by more than the CPI or pass on price risesoverall cost of these items. If the original basket had
that have not been affected by CPI, thus increasinga value of 100 and this quarter's costs have risen to
their profit margins.102 we'll see a CPI rise of 2%. The increase in CPI is
For example, a services industry may pass on a 5%called inflation. Very simple.
price rise, whereas the cost of running their businessFor more information on Financial Market Training
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It is also important to note that even if the overalltrainings include Stock market technical analysis, Use
number does increase it may be that several of theof foreign financial instruments like Forex and CFD's,
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