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Kavan Choksi Wealth Advisor Discusses How the Consumer Price Index (CPI) Measures Inflation

Price Index (CPI) Measures

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The Consumer Price Index or CPI is a vital tool that underlines the changes in the cost of services and goods over a span of time. As per Kavan Choksi Wealth Advisor, the official inflation rate is the calculation of changes in the CPI over a span of time. Even though CPI might seem like complicated economic data, it is vital to understand that it does impact consumers in several ways. It captures their purchasing power, determines their eligibility for government programs, and more. CPI is also important for gauging the overall health of the economy of the United States. It is one of the vital indicators used by people to demonstrate how much prices are rising or falling.

Kavan Choksi Wealth Advisorsheds light on how CPI measures inflation

CPI is known to track the rate of change in the inflation of the United States over time. This important economic metric is based on the prices paid by consumers for various goods and services throughout the US economy. The inflation rate implies to the percentage change in CPI over a period of time. A monthly CPI report is released by the US Bureau of Labor Statistics (BLS), which includes statistics associated with how prices of varying services and goods change over the last month and the last 12-month period. Apart from the headline data, there is also something known as “core CPI” inflation that has to be taken into account. This measure provides somewhat stable reading on inflation by stripping out energy and food prices from the calculation. Prices of such goods usually experience sizable and unpredictable changes month to month that do not have much to do with consumer demand.

CPI data recently released on February 13, 2024 covers the month of January. The January CPI annual inflation figure was 3.1% prior to the seasonal adjustment. This basically means that the cost of a based on goods and services in the United States increased by an average of 3.1% from January 2023 to January 2024. This was essentially lower than the figures of December prior to adjustment, which came in at 3.4%. The January core CPI reading was 3.9%, the same as the December core CPI reading, which was 3.9% before seasonal adjustment as well. Nevertheless, this figure remains significantly below the 40-year high recorded in September 2022, where the 12-month rate reached 6.6%.

As Kavan Choksi Wealth Advisor mentions, the calculation of CPI involves monitoring the fluctuations in prices within a fixed basket of goods and services. The BLS uses several sources to compute CPI, encompassing prices of goods and services from approximately 23,000 retail and service establishments across the US. Additionally, data is gathered from around 50,000 landlords and tenants to ascertain changes in rent prices.

The basket of goods and services used for CPI involves various items popularly purchased by Americans. The valuation of these items is typically proportional to how they are sold. The current cost of the basket is compared to its cost in the prior year, and subsequently multiplied by 100 to determine the percentage. The calculated CPI is then tends to be used to determine the inflation rate. The monthly CPI report includes inflation rates for diverse goods and services, along with the rate of inflation in various regions across the United States.

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