How does cpi affect the stock market

How does cpi affect the stock market

Posted: mira Date: 23.05.2017

Around the middle of every month, the Bureau of Labor Statistics issues its Consumer Price Index, known commonly as the CPI.

This is an index of prices consumers in urban areas are paying for a specific list, or market basket, of goods and services. The monthly announcement indicates the percent change since the previous month in the average prices of the market basket of goods and services tracked by the CPI.

Since it shows the direction of prices, it is considered an indicator of inflation and one of the most important economic indicators. Consequently, the CPI affects stock market trading. The market basket is made up of more than categories of goods and services, organized into eight groups: The CPI also includes taxes that are associated with the purchase of these goods and services as well as government fees such as water and sewerage charges, auto registration fees and vehicle tolls. As a gauge of the cost of living, it gives a good idea of how the consumer's lifestyle is being affected by the prices of common purchases.

When the consumer is spending more each month on basics, it is likely he will moderate savings and spending on large-ticket items. This is why the stock market watches the CPI. If the consumer cuts back spending because basic expenses are too high, a recession usually follows and this means lower earnings for public companies and lower prices for their stocks.

Inflation happens when there are too many dollars floating about in the monetary system. When the supply of dollars exceeds the supply of goods to buy, each dollar is worth less, so the prices of those goods increase. It seems logical that corporate revenues would also increase as prices for their goods increase, but corporate expenses also increase.

When the Federal Reserve thinks the growth of CPI has been so rapid that it is inflationary, it steps in to raise interest rates and remove money from the system by increasing bank reserve requirements and by selling Treasury securities into the open market.

These restrictive Fed actions raise interest rates and restrict the amount of money banks can lend. This, in turn, makes operating a company more expensive and reduces consumer borrowing to buy goods.

When companies pull back on their expansion and consumers slow spending, the economy moves into recession and stock prices fall. Stock prices reflect the market's estimation of future economic growth. When the Fed moves to cool down an overheated economy, it is also temporarily limiting the pace of future economic growth. When this happens, earnings can be expected to decline as business slows.

Since each share of stock represents a fractional ownership in the underlying company, if the company's business slows, its earnings per share of stock will decline.

Since stock prices are based on earnings per share, the stock prices also fall. The CPI is the most widely used economic indicator. The Federal Reserve watches it closely to monitor the economy and formulate Fed monetary policy.

It also is used to adjust Social Security benefits and other government payments that are geared to follow inflation. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.

This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm.

Visit performance for information about the performance numbers displayed above. Skip to main content.

How does inflation affect the stock market? | Inquirer Business

Stock Prices CPI Vs. How to Calculate Returns on Investments With Inflation Does the National Trade Deficit Have an Impact on the Stock Market? Common Stock Index How Do the Prices Change in the Stock Market?

CPI Components The market basket is made up of more than categories of goods and services, organized into eight groups: Inflation Inflation happens when there are too many dollars floating about in the monetary system. Stock Prices Stock prices reflect the market's estimation of future economic growth. Economic Indicators The CPI is the most widely used economic indicator.

References 4 Bureau of Labor Statistics: Consumer Price Index The Winning Investor: Which Economic Announcements Affect the Market?

how does cpi affect the stock market

Why Good News is Bad News on Wall Street Bureau of Labor Statistics: Addendum to Frequently Asked Questions. Is There Any Way to Short Municipal Bonds? Related Articles What Index Is Attached to Treasury Inflation-Protected Securities TIPS for Inflation? What Happens When the Dow Jones Average Drops? Is Now a Good Time to Invest in Index Mutual Funds?

how does cpi affect the stock market

Money Sense E-newsletter Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. How to Trade the VIX How Are the Prices of Stock Set on the NYSE?

How does inflation affect the stock market? | Inquirer Business

Stock Market Index Classification. Trending Topics Latest Most Popular More Commentary. Quick Links Services Account Types Premium Services Zacks Rank Research Personal Finance Commentary Education.

how does cpi affect the stock market

Resources Help About Zacks Disclosure Privacy Policy Performance Site Map. Client Support Contact Us Share Feedback Media Careers Affiliate Advertise. Follow Us Facebook Twitter Linkedin RSS You Tube. Zacks Research is Reported On: Logos for Yahoo, MSN, MarketWatch, Nasdaq, Forbes, Investors.

Logo BBB Better Business Bureau. NYSE and AMEX data is at least 20 minutes delayed. NASDAQ data is at least 15 minutes delayed.

inserted by FC2 system