Key Takeaways
- Every month, the U.S. Bureau of Labor Statistics releases the Consumer Price Index (CPI) data which is then used to calculate inflation numbers.
- As inflation numbers go up, consumer purchasing power goes down, and consumers are forced to spend more money for the same items.
- Inflation data is used to determine economic policies which then impact everyone as rate hikes make the cost of borrowing money more expensive.
The most recent inflation data came out on October 13 and made it clear that while inflation has eased a bit, it’s still soaring with no clear end in sight. The U.S. Bureau of Labor Statistics announced the September inflation figures, which confirmed that rate hikes will likely continue for the foreseeable future as the economy has to sufficiently cool itself down.
While the headline rate was up 0.4% for the month, the rate for the last 12 months was slightly down from 8.3% to 8.2%. You could argue that this news is positive since the inflation rate didn’t rise, but few people seemed excited about the data.
We’ll look at when the inflation data comes out and what’s reported in these figures to understand better what these significant numbers mean.
Where does inflation data come from?
We often hear about inflation numbers, but we may not know where these numbers actually come from. The media gets inflation data from the U.S. Bureau of Labor Statistics when they release the monthly Consumer Price Index (CPI).
The monthly report breaks down the inflation rate for every category in a table so you can see how much prices went up in areas like energy, take-out food, new vehicles, used cars, and so on. The table displays the price change over time by looking at the previous month and the annual figures.
October inflation data will be released on November 10, 2022, at 8:30 am eastern time.
The Consumer Price Index (CPI) measures the average change in the price of a basket of consumer goods and services over time. The index is an indicator of inflation, and it’s watched closely by the financial markets and policymakers. The entire point of the index is to measure the monthly change in prices.
So, for example, consumer prices rose by 8.2% from the previous year, down from 8.3% in August. One can argue that this is a positive sign, but the reality is that the most aggressive rate hike campaign in years will likely continue from the Fed as the inflation numbers haven’t been decreasing enough. Then there’s the core CPI, which excludes volatile items like food and energy from the equation. We will look at what this data means in the next section.
How is inflation data calculated?
The BLS is Bureau of Labor Statistics.
The BLS reports the changes in the Consumer Price Index
The BLS calculates the CPI number using the average cost of a basket of goods in the month and divides it by the same basket from the previous month. The BLS reports the change in prices from one month to the next. This is why we often hear about the rising inflation on a monthly basis.
How does the BLS gather CPI data?
The basket of consumer goods and services refers to roughly 80,000 items representing what Americans buy daily. The BLS has classified all expenditures into more than 200 categories with eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services).
The report also tries to account for how important the various products are to the average consumer by weighting their categories. These are the different CPI categories and the weight that they are assigned:
Housing: 32.3%
Commodities: 21.2%
Food: 13.5%
Energy: 8.8%
Education: 7.6%
Health care: 6.8%.
Transportation: 5.9%.
Other expenses: 4%.
Looking at the most recent table from the BLS, you’ll notice that food prices are up 11.2% for the year while energy expenses are up 19.8%, contributing to an increased number. So while the economy may be cooling down in some sectors, energy costs continue to rise with all of the global conflicts and supply chain issues.
Is CPI the best measure of inflation?
This data makes the most sense if you’re looking to track the costs of everyday items. Since the index looks at a market basket of goods and services, the data is most relevant to those who want to see how overall prices in the economy are increasing.
What’s the most important number?
Some will say that core inflation, which removes the two most volatile items of food and energy from the data, is a better indicator. Unfortunately, core inflation increased by 0.6% in September, so the annual rate is at a 40-year high of 6.6%.
Are inflation numbers accurate?
It’s important to remind you that these numbers are simply an average, and they may not necessarily reflect everyone’s experiences. For example, you may notice that in your community, the prices of some goods and services have disproportionately increased compared to other parts of the country.
Depending on your lifestyle and financial situation, you may feel financial pain more in particular areas. You may also notice that inflation doesn’t impact you in areas where others are struggling. For example, if you have solar panels installed, you may save money on energy bills while other consumers are seeing significant increases.
Why are the inflation numbers so important?
The inflation numbers show us how expensive everything is around us over time, but is there a greater significance to this data? Central banks globally are tasked with keeping inflation at a reasonable rate, and when inflation begins to soar, the central banks have to get involved by raising interest rates to cool down the economy. When the rates begin to rise, this impacts everyone, and there’s always a possibility of the entire economy sliding into a recession.
Aside from determining economic policies, here are the other main reasons why the CPI inflation numbers are essential to all of us:
- They show our purchasing power. When inflation increases, purchasing power decreases because every dollar you spend gets you less product.
- They determine government programs. The federal government will use inflation rates to adjust the payments for various programs like food stamps and public school lunches.
- They impact salaries. CPI data is a common metric for keeping salaries competitive in many private companies.
Inflation data is paramount to our everyday lives; we can’t ignore these figures even when they’re frustrating.
What’s next for inflation?
The one question that all experts are trying to figure out right now. It looks like inflation is slowing down a bit, but it’s taking a painfully long time to drop from its 40-year high. While the primary inflation rate hit this high in June, the core inflation just accomplished the same feat in September. We have cooled off from the 9.1% inflation in June, but we have a long way to go before the rate hikes stop.
Many experts have predicted that the Fed will have to raise rates once again when they meet in November. The members of the rate-setting Federal Open Market Committee (FOMC) will be meeting on November 1 and 2 to discuss what’s next for interest rates. At the last meeting, the members agreed that the economy needed to slow down for inflation to be curbed. As a result, many expect the Fed to continue rate hikes until early 2023 when they will hopefully leave them be for the remainder of the year.
The biggest dilemma with raising interest rates to combat soaring inflation is that the aggressive hikes could tip the entire economy into a recession, which would mean suffering for many. While the Fed has almost abandoned the goal of engineering a soft landing, there’s still hope that we could have a growth recession instead of a full-blown recession.
How should you be investing?
Periods of high inflation impact every investment as investors become more concerned about how the economy will respond to the rate hikes, and because everything is becoming more expensive, so we need higher returns on our money just to keep pace with inflation.
With a target inflation range of 2-3%, it’s clear that the current rate is absurdly high. Since the Fed is determined to bring the inflation numbers down, we can expect more rate hikes and stock market volatility.
If you’re concerned about investing during times of high inflation, we suggest you take a good, long look at Q.ai’s Inflation Kit. We use the power of AI to predict and adjust positions in this diversified portfolio of assets designed to mitigate rising inflation risks. You can also turn on Portfolio Protection to further protect your money during times of high market volatility.
Bottom Line
Inflation’s descent from record-high numbers will likely be excruciatingly slow. The stubborn inflation numbers have many experts concerned about the real possibility of a recession coming soon since the Fed will have to continue rate hikes until the economy slows down. So we’ll keep tracking the inflation data as it comes out.
Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.
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