CPI: the pitch of the economy

Both talk about the CPI (Consumer Price Index) that may not know the definition of what is and what it tells us.

The CPI measures changes in prices of goods and services consumed by households. Is an index to individuals, not to companies.

It is estimated to pose a basket of goods and services mean that supposedly consumed by households in a particular geographic area, so that we should see how much it is representative of the way we consume.

But beyond these obvious and immediate readings, the CPI also must serve to see the pitch of the economy.

In the free market system, the price of a good or service is where the line of supply and demand (strictly macroeconomic theory) matches. If we feel that the price is increasing over time, that things are more expensive tomorrow than today, it drives us to buy, to consume, and to accelerate the economic growth.

If so, the CPI should be positive, not overly (thus, the European Central Bank, ECB has in its mandate to stabilize the harmonized CPI, HICP, to 2.00% in the euro area) as it is very high we enter into an inflationary spiral, unstable, difficult to manage because it is very difficult to fix prices in production if the goods vary widely and quickly.

With the same reasoning, when the CPI is negative or downward trend, it doesn’t encourage consumption, tomorrow things will be cheaper, and the consumer wait for make the decision to purchase later so that consumption slows economic tone.

But reading is not always so simple. In the long current economic and financial crisis, CPI may also be influenced by fiscal and speculative decisions.

So the following advice to help you see the health of the economy of the geographical area in which we live:

  1. Working with core CPI data that corresponds to the CPI data without fresh food or energy due to their high volatility, variability: in this way we will see the trend of the CPI in the medium to long term. (Between 50 and 70 basis points less would be normal in developed countries.)
  2. Take away of the core CPI the effect of tax increases. The practice is sometimes used as a VAT trudge may lead to an increase in the CPI of 100 basis points (1%). (In addition to other taxes, fees, etc.).

So we can receive data from CPI 2.6%, for example, which may correspond to a CPI of 2.0% and a net core CPI (excluding tax) of 1%. Reading a CPI of 2.6 or 1% CPI points us to a state of health of our economy quite different: with the first value we have a growing economy and generate net working places, in the second one, anemic economy with little shade and perspective of stagnation. Attention to sales forecasts and investment plans!

February 9th, 2013 by Albert Vila | Categories: Banks, Finance, Macroeconomics

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