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Since US CPI is being released tomorrow, I thought it would a great idea to discuss exactly what CPI is and how it relates to forex.

I’ve organized today’s post in a question-and-answer format. I’ve provided two different versions of the answer.

The second answer or the “street” answer is for those who like to keep it real.

What is the CPI? What does it measure?

Formal answer: The CPI is a measure of the change over time in the prices paid by consumers for a market basket of goods and services.

Street answer: Yo check it, if the price of a Bentley goes up or down from the last month, CPI aka “cee peezy” measures that change in price.

What’s in this “basket of goods and services”?

Formal: answer: These goods and services include food, clothing, shelter, newspapers and CDs. Items on which the average consumer spends a great deal of money, such as food, are given more weight, or importance, in computing the index than items such as toothpaste and movie tickets, on which the average consumer spends comparatively less.

Street answer: My Cadallic Escalade, my girl’s Manolo heels and Burberry purses, my Gucci shirts, Louis Vutton bags, Cristal and Hennesy bottles, Sprewell rims, and let me smile fo you so you can see my new grillz.

What about investments?

Formal answer: The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. These items relate to savings and not to day-to-day consumption expenses.

Street answer: It don’t include my three cribs and song royalties yo.

Why is it important to measure the economy?

The CPI helps measure the purchasing power of the consumer’s dollar.

What is the relationship between the CPI and inflation?

Formal answer: The CPI measures inflation (a sustained rise in prices in an economy) as experienced by consumers in their day-to-day living expenses

The increase in the CPI is what most people think of as the “inflation rate.” It is used by retailers in predicting future price increases, by employers in calculating salaries, and by the government in determining cost-of-living increases for Social Security.

Street answer: I’m thinking about buying the Bentley but I got to sell some records first and get pizaid. The price of the Bentley goes up every month though (CPI increases) but I ain’t getting paid no higher than before, so the paper I’m making is able to buy less and less after every month (inflation).

How are CPI prices collected and reviewed?

Formal answer: Each month, data collectors from the Bureau of Labor Statistics (BLS) called economic assistants visit or call thousands of retail stores, service establishments, rental units, and doctors’ offices, all over the United States to obtain price information on thousands of items used to track and measure price change in the CPI.

These economic assistants record the prices of about 80,000 items each month. These 80,000 prices represent a scientifically selected sample of the prices paid by consumers for the goods and services purchased.

During each call or visit, the economic assistant collects price data on a specific good or service that was precisely defined during an earlier visit. If the selected item is available, the economic assistant records its price.

If the selected item is no longer available, or if there have been changes in the quality or quantity (for example, eggs sold in packages of 8 when previously they had been sold by the dozen) of the good or service since the last time prices had been collected, the economic assistant selects a new item or records the quality change in the current item.

The recorded information is sent to the national office of BLS where commodity specialists, who have detailed knowledge about the particular goods or services priced, review the data. These specialists check the data for accuracy and consistency and make any necessary corrections or adjustments.

These can range from an adjustment for a change in the size or quantity of a packaged item to more complex adjustments based upon statistical analysis of the value of an item’s features or quality.

Thus, the commodity specialists strive to prevent changes in the quality of items from affecting the CPI’s measurement of price change.

Street Answer: The goverment does everything yo.

How does CPI affect me as a forex trader?

Formal answer: Signs of inflation means the central bank has to raise interest rates. The most widely used indicator of inflation is CPI. If CPI is increasing, then it gives a central bank such as the Fed the necessary supportive data to hike rates. Higher interest rates are bullish for the country’s currency.

Street answer: Yo, if CPI is higher than expected tomorrow, the dollar will go up. If it’s lower, the dollar will go down. Word.