An index that measures the weighted average of prices to a fixed basket of goods and services, such as transportation, medical care, and food; the index is commonly known by its abbreviation, CPI.
The index is referred to as headline inflation and for that considered as the cost-of-living index. The CPI is calculated by averaging the change in prices for each item in the predetermined basket, in which the goods are weighted according to their importance.
The data is reported on a monthly basis mostly in the middle of the month subsequent to the reporting month by the Office for National Statistics providing general approximation to price levels faced by consumers in that defined period of time. Usually the change compiled in prices is within urban areas, it's computed by dividing the weighted price of the market basket in a time period by the weighted price of the market basket in a designated base time period. The resulting ratio times 100 yields an index with a value of 100 for the base time period.
The reading is usually released as well on the Core level, which if we look at Core CPI is the change in prices excluding the volatile items, such as food and energy, the eliminations to those variables provide a more accurate look at the overall trend of inflation, and for that reason it is thought to be the measure to underlying long-term inflation.
The index is vital as the percentage change in the CPI is a measure of inflation, and for that is one of the major indices used to adjust variables for the effect of inflation; the measure is one of the most frequently used to identify periods of inflation or deflation.
The Consumer Price Index (CPI) is considered a reflection to a very important aspect in the market and that is as we all know, inflation. The value that lay in this index as it is the inflation measure in prices by the consumers themselves which are considered the moving wheel of the economy. This index is looked upon in various angels, the key and most important is the percentage of increase in prices in a certain time, the increase in the CPI reading is a very solid indicator of inflation that is associated with economical growth in the economy, and therefore it reflects the wellbeing state of the economy. As this is the most valuable essence it is used then to adjust wages and salaries that is the key to maintain the growth, for if the inflation level overcomes the personal earnings of individuals it affects the level of spending in the economy that consequently fiddles with the demand levels and by that the production levels.
As it is known, currency strength is merely an outcome of the current economy, as the CPI is a major index for inflation levels an increase in the number means growth and higher confidence in the economy meaning a stronger currency, which is a positive effect, for the currency will appear for investors more tempting to buy. Concerning the equity market growth means the production wheel is on the run then definitely it has as well a positive effect on the equity market, and vise versa in both case. In an exceptional case when all the economy's focus is on lowering their inflation levels a high reading in the CPI is considered a bad indicator for the economy that means adjusting their monetary policies is highly demanded to withhold the growth rate in the economy empowering it further and managing inflation risks. Best Case ScenarioThe best scenario will be if the actual reading came in higher than expectations, which reflects that prices has responded to all the steps the government and the Bank of England took, and all the stimulation for the economic activity, indicating also that prices inched higher with the increase of energy prices from 34$ to around 70$.Worst Case ScenarioThe worst case scenario will be if the actual reading declined below 0.0% the prior reading, confirming the decrease of demand levels on products and services affected by increasing unemployment rates in UK which reached to its highest levels in 14 years, which will lead to increasing fears and pessimism that the economy might be heading towards deflation.