Consumer Price Index Report Details Inflation

The Consumer Price Index, or CPI, is the main inflation report for the futures and financial markets. Unexpected rises in this indicator usually lead to falling bond prices, rising interest rates, and increased market volatility.

Consumer prices are important because consumer buying drives the U.S. economy. No consumer demand at the retail level means no demand for products along the other steps in the chain of manufacturers, wholesalers, and retailers.

Here are some key factors that govern consumer prices and the inflation that they measure:

  • Prices at the consumer level are not as sensitive to supply and demand as they are to the ability of retailers to pass their own costs on to consumers. For example, clothing retailers can’t always or immediately pass their wholesale costs for fabric components or labor to consumers, because they’ll start buying discount clothing if premium apparel is too expensive. Much of this volatility has to do with the fact that a large amount of retail merchandise is made in Asia, where labor is cheap and competition is stiff.

  • Supply tends to be more important in many cases than demand. When enough of something is available, prices tend to stay down. Scarcities, however, don’t necessarily mean inflation (but they certainly can accompany it).

  • Inflation is not a price phenomenon but rather a monetary phenomenon. When too much money is chasing too few goods, inflation appears.

  • Inflationary expectations and consumer prices are related. This factor is true because inflationary expectations are built into the cost of borrowing money.

  • By the time prices begin to rise at the consumer level, the supply-and-demand equation, price discovery, and pressure on the system have been ongoing at other levels of the price chain for some time.

The relationship between prices and interest rates is key to developing an intuitive feeling for futures trading.

The release of the CPI usually moves the markets for interest-rate, currency, and stock-index futures, and it’s one of the better reports with which to trade option strategies, such as straddles.

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