The Consumer Price Index (CPI) measures the average change in prices paid by consumers for goods and services over time. It tracks a basket of everyday items—food, housing, transportation, medical care, and others—weighted by their share of typical household spending. CPI is the primary indicator of inflation and affects purchasing power and central bank policy.
CPI is calculated by comparing current prices of items in the fixed basket to their prices in a base year, then weighting each item by its importance to average consumers. Categories that make up a larger share of typical household spending, such as housing, have a larger impact on the overall CPI than smaller categories. Governments release CPI monthly, making it one of the most closely watched economic indicators.
For forex traders, CPI releases are significant because they trigger central bank interest rate decisions and currency movements. Higher-than-expected CPI often leads central banks to raise interest rates, which typically strengthens the domestic currency. Lower-than-expected CPI suggests disinflation, which may lead to rate cuts and currency weakness. Many traders time their positions around CPI announcements because the volatility and direction of price moves are often predictable based on the report versus expectations.
Types of CPI
Most countries publish multiple CPI measures. The U.S. publishes CPI-U (urban consumers, representing about 88% of the population) and CPI-W (wage earners and clerical workers). These segments may show different inflation trends depending on the goods they purchase.
