The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The CPIs are based on prices of food, clothing, shelter, fuels, transportation, doctors, labor services, drugs, and other goods that people buy for day-to-day living.
CPI is the data that decides the rate of inflation in percentage and the US Bureau of Labor Statistics has reported the CPI monthly since 1913.
What analysts commented on US CPI Data of 10th May:
‘Inflation trends in the U.S. continue to head the right direction, but still have a long way to go before they reach the Fed’s 2% target. Labor market conditions still look strong, but are showing cracks under the surface, and tension remains among regional banking credit markets. Increasingly, we expect the Federal Reserve will have to balance risks between sticky inflation, and slowing growth momentum / tighter financial conditions. We continue to expect the move last week to be the last one this cycle, leaving the Fed on hold until later this year.’
Higher inflation in the form of a higher CPI naturally makes an individual unit of currency worth less, as there are more units of that currency needed to buy a given item.
The interesting fact is that the U.S CPI recent data has seen the two faces of both increase and decline of CPI in recent months, in different sectors.
According to the U.S. Bureau of Labor Statistics reports, The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in April on a seasonally adjusted basis, after increasing 0.1 percent in March. Over the last 12 months, the all-items index increased 4.9 percent before seasonal adjustment.
What CPI data says about the current scenario
Consumer inflation in the US measured by the Consumer Price Index (CPI) ticked lower in April to 4.9% from 5% in March. The Core CPI slowed down from 5.6% in March to 5.5% in April. Numbers came mostly in line with expectations. The Fed Funds rate at 5.00%-5.25% is now above the annual CPI.
The Consumer Price Index (CPI) is a critical indicator of pricing pressures in an economy and provides a gauge of inflation. Forex traders monitor the CPI, as it can lead to changes in monetary policy by the central bank that will either strengthen or weaken the currency against rivals in the markets. The strength or weakness of a currency can also have a significant impact on the earnings performance of companies with a presence in many global markets.
What now is the big question ?
The impact inflation has on the time value of money is that it decreases the value of a dollar over time. The time value of money is a concept that describes how the money available to you today is worth more than the same amount of money at a future date.
With the rise in inflation, the value of dollar will be decreased, which will affect the consuming capacity on the consumers. This can lead to a decline in consumer spending, which can negatively impact businesses and the overall economy.
The Fed will increase the rates of interest, to fight against the high inflation. Therefore, the most effect will be met on businesses and consumers who needs to borrow money, and hence will lag economic growth of the country.
There will be fluctuation in global trade, if the dollar starts losing its value, the export cost will be less and will make it seem attractive for other countries like India to deal and consequently the import rates will be suffered, which will lead to a trade deficit.
The direct impact on India, if U.S inflation rates goes high
The economic bonds of both the nation decides the impact of high inflation effects on India.
India is a huge oil importer country and it depends on dollar for imports, if inflation goes high, the imports that U.S make for oil will also go high, indirectly will hamper the economic growth of India.
The direct trade agreement between BRICS if it falls through provide a relief on US dollar but if implemented timely bypassing the US dollar standard can provide a major relief for Dollar dependence and a boost for Indian Rupee
In conclusion, the government, policymakers need to keep an eye on the developments in the US markets with general elections just round the corner and RBI’s next meeting in June will tell the stance of the Central bank and how they see the things from a macroscopic lens.