CPI and Core CPI Explained: The Impact of Wage Inflation and Corporate Margins on Inflation

The release of CPI (Consumer Price Index) and Core CPI data is always a much-anticipated event, as these are some of the most important economic indicators that inform the Federal Reserve’s monetary policy decisions. Today, the announcement will take place at 10:30 pm AEST and is expected to be a market mover, given the current inflation concerns. In this article, we will discuss the difference between CPI and Core CPI, the factors that are driving inflation, and their impact on the economy.

What is CPI and Core CPI?

CPI is a measure of the average change in prices paid by urban consumers for a basket of goods and services. It includes a wide range of consumer goods, such as food, housing, transportation, and medical care, among others. It is a broad indicator of inflation and is used to track the purchasing power of the dollar.

Core CPI is a measure of the average change in prices paid by urban consumers for a basket of goods and services, excluding food and energy prices. The reason for excluding food and energy prices is that they are considered volatile and can fluctuate significantly due to seasonal factors or global events, such as the recent increase in oil prices due to tensions in the Middle East.

US CPI & Core CPI YoY

The Impact of Wage Inflation on Inflation

Wage inflation is another significant factor driving inflation. As the labor market tightens, wages are rising, and companies are passing these higher labor costs onto their customers. Additionally, there is a shortage of workers in certain industries, which is driving wages up further.

This increase in wages and labor costs is contributing to the rise in inflation. Although higher wages may seem like a positive development for workers, the downside is that it can lead to higher prices for goods and services, which reduces the purchasing power of consumers.

US Private Sector Wage Growth

The Impact of Corporate Margins on Inflation

The narrative that supply chain disruptions related to the pandemic led to shortages and forced the costs of goods to rise, which in turn drove inflation across the economy, is not entirely accurate. Despite the price hikes, corporate profit margins actually expanded. Even as supply chains have normalized and costs have come down, corporations haven’t made a commensurate move lower on their prices. Recent data shows that profit margins remain high and in some cases are expanding.

During the Federal Reserve’s post-monetary policy meeting press conference, Fed Chair Jerome Powell acknowledged that higher profits and higher margins are what happens when there is an imbalance between supply and demand – too much demand and not enough supply. Powell attributed the sticky inflation in the core baskets to the lack of flexibility in supply chains and the resulting imbalance between supply and demand.

US Corporate Profit Margins

The Announcement

The announcement of the Consumer Price Index (CPI) coming out tonight is highly anticipated by investors and traders alike, as it has the potential to significantly affect the markets. With no interest rate hike currently priced in by the majority of the market, any further increase in Core CPI is likely to result in a downturn in the markets. However, if Core CPI comes in at 5.5% or below, markets should have some room to run. At this time of heightened market volatility, it is crucial to remember the importance of a well-planned trading strategy that can handle significant swings in the markets. It is advisable to avoid trading if your strategy is not capable of managing these swings effectively.

Current Federal Funds Rate Probabilities for the Next FOMC

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