Know more about Consumer Price Index (CPI)
Consumer Price Index (CPI) is an index that measures changes in the level of prices of goods and services that households acquire for the purpose of consumption over time.
Basics of CPI
CPI is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc. It is considered as one of the most important economic indicators as CPI numbers indicate or show the current picture of inflation in the country.
The base year monitored by the Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation (MOSPI) currently is 2012 shifted from 2010. This change in base year was effective from January 2015 onwards.
The formula for calculating CPI is:
(Cost of a fixed basket of goods and services in the current year/cost of a fixed basket of goods and services in the base year) * 100
As per the data released by National Statistical Office (NSO), the Consumer Price Index (Combined) for July 2021 came in at 5.59 per cent against 6.26 per cent in June 2021 and 6.73 per cent in July 2020. The index has increased to 162.50 points in July from 161.30 points in June 2021. The RBI has projected the CPI inflation at 5.7 per cent during 2021-22 which is further elaborated as 5.9 per cent in Q2FY22, 5.3 in Q3FY22 and 5.8 in Q4FY22. CPI inflation for Q1FY23 is projected at 5.1 per cent by RBI.
Impact of change in CPI on the stock prices
When CPI increases it indicates that inflation will increase which results in a rise in spending and reduces the saving of people. In simple terms, the purchasing power of people reduces. Due to a reduction in spending, consumption in the market declines which results in lower earnings for companies. This leads to a decline in the stock prices of such listed companies.
On the other hand, when CPI decreases it indicates that inflation will ease out which decreases spending and increases the saving of people. In simple terms, the purchasing power of people increases. As consumption increases there would be higher earnings for companies. This has a positive impact leading to a rise in stock prices.
High market volatility is observed during the inflation phase. As per market experts, value stocks perform better during the high inflation phase while growth stocks perform better during the low inflation phase. However, this inverse relationship between inflation and stock prices can be seen over the short term only. While making investment decision, any company should be assessed and evaluated on individual micro factors or parameters.