Kavan Choksi Wealth Advisor Talks About Why the Consumer Price Index (CPI) Matters

The Consumer Price Index (CPI) is a key economic indicator that plays a crucial role in understanding and assessing the overall health of an economy. As per Kavan Choksi Wealth Advisor, the CPI is defined as the change in the prices of a basket of goods and services that are typically purchased by specific groups of households. The CPI of a country basically tracks the prices of the daily goods and services purchased by its households, including food, clothing, transport and leisure spending. Economists ideally work out how prices are rising or falling and how this affects the cost of living by averaging out price changes across a basket of these goods. Even small items like a bus tickets or a loaf of bread can be a part of this basket, along with major purchases like a car.

Kavan Choksi Wealth Advisor sheds light on the importance and use of the consumer price index (CPI)

The majority of the countries tend to update their CPIs on a monthly basis. This CPI is estimated as a series of summary measures of the period-to-period proportional change in the prices of a fixed set of consumer goods and services of constant quantity and characteristics. These items are acquired, used, or paid for by the reference population. Each summary measure is formed as a weighted average, combining numerous elementary aggregate indices. Additionally, each elementary aggregate index is derived from a sample of prices for a specified set of goods and services collected in a particular region from a defined set of outlets or other sources of consumer goods and services, typically by or for the residents of that region.

Governments across the world have been tracking consumer prices for decades. The Bureau of Labor Statistics in the United States, for instance, started to gather CPI data in 1913. Its data collectors ideally record the prices of about 80,000 items a month across more than 200 categories. This data can be collected online, by making in-person visits or by calling thousands of shops and service providers across the US.

In the opinion of Kavan Choksi Wealth Advisor, CPI is one of the most commonly used tools for measuring inflation and deflation. Inflation is a vital indicator of the health of an economy. Central banks and governments widely use CPI and other indices to make a number of critical economic decisions. One of the major decisions among these is whether to raise or lower interest rates. High interest rates make it more expensive to borrow funds and are designed to lower customer spending, and in turn, the inflation rates. Lower interest rates; on the other hand, are meant to encourage more consumer spending, in order to keep inflation in line with a country’s target. The Consumer Price Index is often used as a guide for wage adjustments in line with the cost of living as well, and also helps measure the eligibility of people for certain benefits like social security. Economists commonly use CPI data in order to measure the total value of goods and services produced by an economy, with the effect of inflation stripped out.