The British Consumer Price Index (CPI)
A consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for consumption by most households. For the British Consumer Price Index, the entire UK is taken into account. It is calculated using the same methodology (HICP) developed by the European Union’s statistical agency (Eurostat). The British CPI is the Bank of England’s target inflation measure.
Why Is The British CPI Important?
Out of all inflation indicators, The consumer price index (CPI) is the most widely followed. An investor or trader who understands how inflation influences the markets will have a tremendous advantage over other investors and traders.
In countries that make up the UK (England, Scotland, Wales, Northern Ireland), where monetary policy decisions rely upon the central bank’s inflation target, the rate of inflation directly affects all interest rates charged to businesses and consumers.
Remember, inflation is an increase in the overall level of prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence markets.
Inflation (along with risk premiums) basically explain how interest rates are set on everything from mortgages, auto loans and Treasury Instruments (bills, notes and bonds). As the expectations on inflation change, the markets adjust interest rates. The effect ripples across all asset classes:
- stocks (equities),
- bonds (fixed income),
- and commodities.
Everyone pays close attention to inflation trends. By tracking the change in inflation investors can anticipate how different types of investments will perform.
Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits leading to more tax revenue for government expenditure.
For monetary policy, the Bank of England (BoE) generally follows the annual change in the consumer price index which is calculated using the European Union’s Eurostat methodology so that inflation numbers are comparable across the EU.
UK Office For National Statistics