Breakdown for September CPI
Understanding the Consumer Price Index (CPI)
The Consumer Price Index (CPI) is one of the most widely followed measures of inflation in the United States. Published monthly by the Bureau of Labor Statistics (BLS), it tracks the change in prices paid by consumers for a representative “basket” of goods and services.
This index is expressed as a weighted average, giving greater influence to categories that make up a larger share of consumer spending. The BLS produces two main versions:
• CPI-U: Measures price changes for all urban consumers, representing about 93% of the U.S. population.
• CPI-W: Focuses on urban wage earners and clerical workers, used primarily for adjusting Social Security benefits.
Unlike the Producer Price Index (PPI), which tracks prices received by producers, the CPI reflects the costs borne directly by households.
How the CPI Is Calculated
The BLS gathers price data from roughly 23,000 retailers and service providers across the country, covering about 94,000 items. Housing alone accounts for nearly one-third of the index, with rents from more than 40,000 housing units helping to determine shelter costs.
Adjustments are made to account for:
• Substitution effects – when consumers switch to cheaper alternatives.
• Quality changes – ensuring improvements in features or durability don’t distort inflation readings.
Through these adjustments, the CPI aims to provide a more accurate picture of changes in the cost of living.
Who Uses the CPI?
The Federal Reserve
The Fed relies heavily on CPI data to shape monetary policy. A sharp rise in CPI can signal accelerating inflation, often prompting the Fed to raise interest rates to cool the economy. Conversely, subdued CPI readings may encourage looser policy to stimulate growth. Since the Fed targets a long-term inflation rate of around 2%, CPI figures above this threshold typically raise the likelihood of rate hikes.
Government Programs
CPI data is also used to adjust income tax brackets, federal pensions, and subsidies. Most notably, nearly 70 million Americans receiving Social Security and Supplemental Security Income (SSI) see annual cost-of-living adjustments tied directly to the CPI.
Housing and Rent
Mortgage rates and long-term borrowing costs are closely linked to inflation expectations. Landlords may also reference CPI data when determining annual rent increases.
Labor Markets
Employers and unions often look to CPI when negotiating wages, particularly in industries where compensation is indexed to inflation. Additionally, CPI serves as a deflator for other economic statistics, such as retail sales and earnings, to separate real growth from price-driven changes.
How CPI Affects the Stock Market
Although markets respond to many variables, CPI is a particularly influential driver of investor sentiment. Higher-than-expected inflation tends to increase the odds of tighter Fed policy, which can reduce corporate profits, slow economic activity, and pressure equity valuations.
• Rising CPI → Higher rates → Market pullback
• Stable CPI → Lower rate pressures → Market support
This dynamic helps explain why CPI release days are often among the most volatile trading sessions each month.
CPI as a Trading Signal
For traders and investors, CPI can guide positioning across asset classes:
• Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) adjust coupon payments to match CPI, helping shield investors from inflation erosion.
• Inflation Swaps and Derivatives: Sophisticated investors may use derivatives contracts linked to CPI changes to hedge or speculate on inflation trends.
• Sector Rotation: Some sectors, such as energy and commodities, often benefit from rising inflation, while others, such as growth-oriented tech stocks, may be more vulnerable to higher rates.
Key Takeaways
• CPI is a critical measure of U.S. inflation, reflecting price changes across a broad range of goods and services.
• It influences Federal Reserve policy, government programs, housing, and wage negotiations.
• For markets, CPI serves as both a warning and a trading opportunity—higher readings typically weigh on equities, while lower readings can be supportive.
• Investors can manage inflation risk through tools such as TIPS, derivatives, and sector rotation strategies.
While not a flawless indicator, the CPI remains one of the most important economic reports for policymakers, businesses, and investors alike. Understanding how it works—and how markets respond—can help traders navigate periods of heightened uncertainty with greater confidence.
Disclaimer:
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Tradient makes no representation or warranty as to its adequacy, completeness, accuracy or timeline for any particular purpose of the above content.