Learn more about this important economic indicator, how it measures the effects of inflation, and what it means for precious metals investing
Inflation has become a household word once again. With the rising cost for food, energy, healthcare and most other essentials, a growing number of Americans are taking notice. Inflation is the most commonly used term to describe general price increases. Expansion of the money supply however, is the correct definition. Rising prices are simply the effect of inflation.
Of course, rising prices heavily influence gold bullion and other metals markets – as concerns about “inflation” become more prevalent, so does the interest in gold, silver and other stores of value.
To explore currency depreciation and its effect on metals like gold bullion and others, check out our piece discussing the relationship between the U.S. Dollar and gold – Buying Gold as a Hedge against Currency Depreciation.
Continue reading to learn more about how changes in prices are measured - namely through Consumer Price Index, or CPI – and how these figures affect your household and gold bullion markets.
What is the CPI and how does it measure prices, or the effects of inflation?
The Consumer Price Index is the broad measure of prices across the entire economy. In the U.S., it is published throughout the year by the U.S. Bureau of Labor Statistics, who defines the CPI as:
“a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
The CPI in the United States traces its beginnings back to World War I when rapid increases in prices were making it more and more necessary to calculate cost-of-living adjustments. It has since become one of the most closely watched economic indicators.
In order to report what it believes the overall price level to be, the CPI breaks expenditures into eight categories, and assigns an official “weight” or average proportion to each. As of December 2011, the categories and their respective proportions were:
- Food & Beverages – 15.256%
- Housing – 41.020%
- Apparel – 3.562%
- Transportation – 16.875%
- Medical Care – 7.061%
- Recreation – 6.044%
- Education and Communication – 6.797%
- Other Goods & Services – 3.385%
Notice these different categories are not listed in order of their relative size, but rather their order of importance in the CPI calculation. Therefore, in calculating changes in prices, the CPI places the highest priority on food, shelter and clothing. Transportation and medical care round out the top five.
As we can see from this chart (courtesy of Doug Short of Advisor Perspectives), how the CPI weights the different categories can provide misleading information on the movement of prices.
For example, if a family has higher medical care expenses, they’re going to feel the effects of inflation much more severely than a family who falls more in line with the CPI’s calculations. Even though the price of clothing has dropped in the last ten years, the price of medical care, housing and other items has increased dramatically.
The Bureau of Labor Statistics breaks CPI figure into two separate reports – the standard CPI (1) and the core CPI (2). The core CPI is the overall inflation rate, excluding food and energy. This indicator is closely monitored by economists and policy makers.
What are the effects of rising CPI numbers on my household?
How rising prices affect your household budget depend on a host of factors. While every one of us may complain about a nickel increase in gas prices, the effects on our personal situation will vary. An increase in fuel prices will affect someone with a longer commute more than someone who lives close to their office, works from home, or is retired.
Rising prices, or inflation, can have painful effects on households who have:
- Fixed incomes
- A higher ratio of transportation costs
- College tuition expenses
- A higher ratio of health care expenses
While the U.S. Central Bank, the Federal Reserve, is trying to increase inflation at the “macro” level, there is of course a “micro” impact - i.e. households. Just how it affects your household depends on the type of expenses you have.
How should gold bullion investors treat figures from the CPI?
Many investors in gold bullion and other precious metals watch the CPI very closely. In addition to figures published by the government, investors naturally refer to figures published by other sources. In decades past, the CPI was calculated differently. Today, certain items are excluded or “substituted” to mask the true extent of rising prices in the economy.
ShadowStats.com is a website that calculates the CPI using older methods. Many gold bullion enthusiasts point to figures like these as proof that the U.S. dollar is devaluing and investment in gold bullion, silver and other metals is warranted.
Inflation, or rather the effects from it, is one of the main factors driving interest in gold bullion and other metals. Gold is in fact considered a hedge against inflation and preserves its value over time - its price in dollars is simply a reflection of the value of the paper currency relative to gold.
If CPI numbers are high, you can be relatively certain that gold bullion prices are on the rise, over time. To protect yourself from the effects of rising prices, many analysts recommend investing in gold bullion, or even silver coins, to protect and grow your wealth.
And to check current prices and availability of gold bullion and other coins and bars, click on over to our main site today!