Consumer Price Index

Chart of the Week for June 05 - June 11, 2009

The chart above illustrates the trend in two versions of the Consumer Price Index (CPI) over time. CPI is a measure of inflation. It is calculated by measuring the average change in price of a given basket of goods. Core CPI is the same index, with food and energy prices excluded.

One can deduce from the chart that food and/or energy prices declined substantially during the latter half of 2008, resulting in negative year-over-year growth for the overall index. While core CPI increased 1.8% during the twelve months ending March 31, 2009, overall CPI decreased by 0.4%. Oil prices may have been one of the major contributors to this decline. After increasing dramatically during the first half of 2008, oil prices crashed beginning in July 2008 following weakened global demand. Crude oil prices fell from $146.32 on July 14, 2008, to $42.44 on February 19, 2009. This represents a 71% decrease over the course of seven months.

The rate of inflation growth as measured by core CPI has remained relatively steady over the past year, despite fears of some observers that massive injections of liquidity into the economy by the U.S. government would lead to hyperinflation. One reason for this may be that, so far, money velocity has not increased in tandem with the money supply. In fact, it has decreased slightly (see last week’s chart). If money is not spent, prices are less likely to face upward pressure. Only time will tell how inflation will ultimately be affected by the global stimulus response to the recession. If inflation does take hold, it will be important for investors to consider how well their portfolio is able to preserve its purchasing power.

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

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