CPI stands for consumer price index. It is the change in the price of a representative basket of goods, such as food, housing, transportation, and clothing. The current prices of the goods in this basket are compared with the prices from the base year. It uses a basket determined in the past, which makes it a Lasperyes-type index. The CPI has eight categories for different types of goods and services. Core CPI is a measure of inflation that excludes volatile food and energy prices to give a better estimation of the long-term inflation trends.
The percentage change in CPI since the base year estimates the inflation rate for the period. So, the index tells us the change in the buying power of an average household with a set amount of dollars. Central banks use the CPI index when they are making policy decisions. For example, the Fed might decide on a higher policy rate based on a higher CPI, and vice versa, because the main goal of many central banks is to ensure price stability. A higher interest rate discourages spending and investment, lowering the level of demand in the economy, and hence decreasing inflationary pressure.
Tomorrow at 8.30 ET or 17.30 IST, new CPI data will be released. This data is very important for the markets. The median estimate for the data by major banks and financial institutions is 6.2%. A higher CPI will mean that inflation is more than expected and it is bearish news. A lower CPI will probably mean that the Fed will raise rates less, and this is bullish. Data around 6.2% isn't very likely to affect the market because that estimate probably is already priced in. I'll update you tomorrow on the data and its effect on the market.
Sources: The Principles of Economics by Mankiw, Yahoo Finance
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