Introduction to Inflation and the CPI Report
In the past, when inflation was low, around 2%, no one was really concerned about the next Consumer Price Index (CPI) report. However, with inflation reaching a 40-year high in 2022, the Federal Reserve had to take action with aggressive interest rate hikes, similar to those during the late Carter and early Reagan administrations. Although inflation peaked in 2022, the implementation of tariffs and a strong labor market have made the central bank cautious about reducing interest rates from their current range of 4.25% to 4.5%.
Understanding the CPI Report
The CPI report is released monthly by the Bureau of Labor Statistics (BLS) and is based on price data collected from 75 urban areas and about 23,000 retail and service establishments across the country. Additionally, data on rents are collected from approximately 50,000 landlords or tenants. The weight for an item in the CPI is derived from reported expenditures on that item as estimated by the Consumer Expenditure Survey. The CPI report is divided into many subcategories, but the two main ones are headline CPI and core CPI. Headline CPI is the primary inflation gauge, while core CPI excludes volatile food and energy prices and is considered a better predictor of future inflation.
CPI vs PCE: Understanding the Difference
Although the CPI report is crucial for understanding inflation, it is not the Federal Reserve’s preferred inflation gauge. The Fed sets its long-term 2% target based on the Personal Consumption Expenditures Price Index (PCE). While the CPI and PCE correlate closely, they measure inflation differently. The PCE includes more comprehensive coverage of goods and services and can change as people substitute away from some goods and services toward others. Historical PCE data can also be revised, unlike CPI data.
Impact of CPI Report on the Economy
The CPI report has become a significant event in the economic calendar, especially with the market’s obsession with the next report. The report’s findings can influence the Federal Reserve’s decision on interest rates, which in turn affects borrowing costs and the overall economy. The next CPI report, scheduled to be released on Tuesday, July 15, will likely play a crucial role in the central bank’s thinking. Goldman Sachs economists expect headline CPI to rise 0.3% month over month, reflecting higher food and energy prices.
Looking Ahead: Future CPI Reports and Their Impact
Going forward, tariffs are likely to provide a moderate boost to monthly inflation. Goldman Sachs economists expect monthly core CPI inflation between 0.3%-0.4% over the next few months. The Federal Reserve will closely monitor these reports to determine its next move on interest rates. The market’s obsession with CPI reports is driven by the desire for lower interest rates, which could lead to higher returns in the future. However, the Fed must balance this with the need to keep inflation under control to avoid abrupt policy changes that could damage its credibility.
Conclusion
In conclusion, the CPI report has become a critical component of the economic calendar, providing valuable insights into inflation trends. Understanding the difference between CPI and PCE is essential for making informed decisions about monetary policy. As the Federal Reserve continues to navigate the complexities of inflation and interest rates, the CPI report will remain a key factor in shaping its decisions. With its impact on borrowing costs, economic growth, and overall financial stability, the CPI report is an essential tool for policymakers, investors, and consumers alike.
