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CPI Basics

The most well known and widely quoted economic indicator is the CPI (Consumer Price Index).

It represents an estimation of the change in prices of consumer goods and services. Generally, it represents a measurement of our expenses on goods and services we use to meet our day-to-day needs.

Severe problems to the overall economy can be caused if the prices of consumer goods and services are abruptly changed.

The CPI includes the measurement in the prices of a basket of goods and services that we use in our daily lives. It is compiled by the Department of Labor's Bureau of Labor Statistics. In order to get the final result for the CPI, wide researches of the prices of the included in the consumer basket goods and services are made. Then they are entered into a special computer program that makes the calculations.

The CPI includes several indexes. But the one that is most widely used covers approximately 87% of the population of the US.

Most people associate the concept of CPI with inflation. An increase in the value of the CPI means that an increase in inflation has been observed.

The importance of CPI is also viewed in the fact that the estimations of other products, services and benefits are directly linked to the levels of the CPI. For example, if the CPI experiences an increase in its value, then the Social Securities benefits will rise as well.

Other things that are directly linked to CPI include:

  • Wages
  • Lease agreements
  • Union contracts
  • Benefit statements and etc.

If the value of the CPI decreases we refer to it as deflation. Recently no deflation has been observed in the US. However, its effects should not be underestimated since it may causes problems that are as serious as those caused by inflation.

Finally, if CPI moves to high levels combined with high interest rates, then serious damages to the market can be experienced. In order to insure your money against the negative effects of such market conditions it is recommended to hold them in precious metals, real estate or other hard assets.

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