Consumer price index

Categories : Category Insights | Economic Indicators Published on : Jul 27 2017

Movements in the CPI influence economic decisions in a number of circumstances. Firstly, the Federal Reserve uses the Personal Consumption Expenditure Price Index, a similar measure of inflation, to guide their monetary policy implementation. Inflation above a certain rate has a number of negative effects on economic growth, which monetary policy tries to avoid. In a growing economy, positive inflation is a result of this growth and deflation typically occurs in a recessionary period. Consequently, a low and steady level of inflation is the standard target. Governments also look at movements in the CPI when making fiscal policy decisions, as expansionary fiscal policy increases aggregate demand but creates inflationary pressures, which put pressure on monetary policy. Furthermore, movements in the CPI are used to influence wage negotiations for workers and unions.

In 2007 and 2008 the consumer price index grew 2.9% and 3.8%, respectively. In 2008, inflation grew strongly in the first four months of the year, but surged between May and July, driven by high energy and food prices. However, as the recession's grip began to spread around the globe, there was a rapid decline in overall commodity prices in the final quarter of the year. The fall in commodity prices continued through 2009, causing the CPI to record its first annual decline in over three decades. The dip was led by transportation prices, due to a 28.0% fall in motor fuel prices, caused by the swift contraction in world oil demand. Additionally, airline prices and other intercity transportation costs slipped by 9.0% and 6.0%, respectively, due to softer demand for domestic and international travel.

Yet fears of an extended period of deflation proved to be untrue, as the economy began its recovery. The CPI rose 1.6% in 2010, 3.2% in 2011 and 2.1% in 2012. In 2015, the CPI grew a slight 0.1%, as the large monetary expansion efforts struggled to filter to consumers as commercial banks did not extend loans. Moreover, a sharp decline in oil prices, which continued through 2016, is expected to have severely limited price growth in 2015 when the bulk of the price collapse occurred. However, the CPI grew 1.3% in 2016. According to the BLS, from January 2016 to January 2017, there was a 3.6% increase in medical expenses that was countered by a 0.2% decline in total food prices. Still, the primary factor driving growth was a 10.8% increase in energy prices. More specifically, motor fuel costs increased 20.2%. In 2017, the CPI is expected to increase 2.5% to 245.9 as economic growth continues and consumers increase their spending habits. Expected interest rate increases from the Federal Reserve are expected to erode inflationary pressures.



Forecast

After several years of slow economic growth, limited by low productivity gains, the Federal Reserve has begun to increase the Federal Funds Rate as they see growth moving in line with projections. The Federal Reserve is anticipated to gradually increase rates in order to limit inflationary pressures and stop the economy from overheating. Consumer spending (the factor driving up demand for goods and services that pushes price levels up) is expected to continue strong growth through 2018 as wages and employment levels continue to grow, which should prompt further spending. As oil prices gradually increase, as demand catches up to the recent oversupply, energy price increases are expected to place upward pressure on CPI. However, as employment growth recedes and economic growth cools off, this should limit price level appreciation. Barring external shocks and consistent monetary policy, the CPI is expected to increase at an annualized rate of 2.4% to 276.3, over the five years to 2022.


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