FXMAG.COM Explains Consumer Price Index (CPI), Core CPI And Unemployment Rate

Indicators help us determine the state of the economy, find out the scope and scale of problems, and whether we have sufficient resources to solve the problem. Thanks to the indicators, we can learn whether the economy is making progress or just the opposite.

This year, the most important indicator on which markets, economies and ordinary people focus is the indicator of inflation. In economics, inflation is a general increase in the prices of goods and services in an economy. And what is it measured? And how indicator can it affect?

 

✕

 

CPI

The previous article talked about the Producer Price Index (PPI), which is ignored when indicating the level of inflation. Key indicator in this situation is the Consumer Price Index (CPI).

According to the definition, the indicator measures the change in the price of a weighted average market basket of consumer goods and services purchased by households. The main categories of the basket of goods and services are: housing, raw materials, food, energy, healthcare, transport, education and other expenses

CPI can be calculated for a given month or for an annual period. For example, the annual change is calculated using the formula:

This indicator has many uses. The most important application is to measure inflation. It is also an important factor that central banks use to adjust their monetary policies, for example to set interest rates. Moreover, since the CPI measures the change in consumers' purchasing power, it is often a key factor in wage negotiations. It also helps consumers to make informed economic decisions. We recently looked at the CPI reports mentioned in another article.

While the CPI is a convenient way of calculating the cost of living and the relative price level over time, it does not provide a completely accurate estimate of the cost of living. Three problems with CPI deserve attention: substitution error, introduction of new items and quality changes. The first problem can be explained simply by saying that since the prices of goods and services fluctuate from year to year, not all of them fluctuate by the same amount. As time passes, new items are added to the basket of goods and services purchased by the average consumer. CPI only uses a fixed basket of goods, the introduction of a new product cannot be reflected. A third problem with CPI is that changes in the quality of goods and services are not well handled. When an item in the fixed basket of goods used to calculate the CPI increases or decreases in quality, the value and attractiveness of the item changes.

Read next: Economic Indicators - ZEW, PPI And Central Banks' Minutes Explained By FXMAG.COM | FXMAG.COM

Core CPI

Another indicator is the Core CPI. The main difference between Core CPI and CPI is that Core in its basket of goods and services does not include the food and energy sectors.

Food and energy prices are excluded from this calculation because their prices may be too volatile or subject to sharp fluctuations. Food and energy are basic commodities, which means that the demand for them doesn't fluctuate much even as prices go up.

 

Unemployment rate

The relationship between inflation and unemployment has traditionally been an inverse correlation. This means that when inflation rises, unemployment drops. However, this relationship is more complicated than it appears at first glance.

The definition of the unemployment rate says that she measures the percentage of the total labor force that is unemployed. Despite the fact that this group is unemployed, it must meet the condition of people actively looking for a job or they express such a desire, it measn that they have taken specific steps to find work.

The unemployment rate is one of the primary economic indicators used to measure the health of an economy. Investors and the general public use the unemployment rate to understand the state of the economy and as a measure of how well the government manages the country. The high unemployment rate makes the economy unable to generate enough jobs for jobseekers. High unemployment not only causes deeper social problems, but also reduces the attractiveness of the country. However, policymakers and central banks are wondering how much unemployment has risen during a particular recession in order to assess the impact of the recession on the economy and decide how to adjust fiscal and monetary policy to mitigate its negative effects.

Source: investopedia.com, A Dictionary of Economics