Now that the 2014 midterm elections are behind us, political pundits and economists are turning their eyes to the 2016 presidential election. That means for the next two years, you will be hearing a lot more about something known as the consumer price index (CPI). This number, published regularly by the Bureau of Labor and Statistics (BLS), is intrinsically tied to inflation.
CPI is measured by in one of two ways. The first is to index the prices paid by urban wage earners and clerical workers for the goods and services necessary for daily life. The second is to index those same prices as among all urban consumers. The latter is the number published by the BLS as it accounts for nearly 87% of the adult U.S. population.
Higher Prices, Higher Inflation
It should be obvious that a higher CPI would be linked to inflation if, for no other reason, than the goods and services indexed are those that are most likely to be purchased by nearly every consumer in the country. This would include everything from food to clothing to gasoline. As consumer prices rise, so does inflation. However, the BLS must observe a higher CPI trend over a sustained period before they will declare an inflationary environment. Likewise, an official period of deflation must demonstrate a sustained period of lower CPI.
When both CPI and inflation are up, one of the inevitable results is a weaker dollar. That is what makes our current economy such a challenge. Wages are not rising as fast as they should, and most of the new jobs added over the last few years have been low-paying, part-time positions not keeping pace with inflation. You are sure to hear a lot about this in the next 24 months.