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Consumer Price Index Basics

CPI stands for Consumer Price Index. It is commonly referred to as a measure of the rate of inflation. Since inflation represents one of the major threats to the economy, the CPI represents one of the most closely observed indicators.

The financial entity responsible for the issuance of the CPI is the Bureau of Labor Statistics. It issues the number for the previous month around the middle of the next one. The CPI is usually cited in percentage (usually a tenth of a percent).

The CPI is based on a consumer basket of goods and services. It compares the prices of the latter on monthly basis.

The goods and services that are included in the consumer basket range from cheap ones to very expensive ones. Additionally, information on their prices is gathered from different in size stores and communities.

The Bureau of Labor Statistics issues information on both the CPI and the core CPI. The first one represents a measurement of the whole basket of goods and services, whereas the second one represents items that are of a more volatile nature (e.g. food, energy). The prices of such goods and services experience frequent changes in their prices and as a result the core CPI is in the focus of attention of most market watchers.

Many times an increase in the CPI has led to the Fed's increase in interest rates. This is usually done in order to curb potentially high inflation rates.

Since the "cost of living" provision of different benefits is linked to the CPI, a careful study in its changes is required.

Finally, you should watch the moves in the values of the CPI since it may directly reflect on your stock investments.

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