Calculating CPI involves a few steps: First, a survey is conducted to determine what a typical consumer usually buys, and from that, a basket of goods is fixed. Second, prices of each item in the basket are recorded for a specified period. Third, the total cost of purchasing the entire basket of goods is calculated by multiplying the quantity by the price of each item in the basket and adding them up. And finally, a base period is used to compare the average price of the reporting period.
Once you have these pieces of data, you can use a simple formula to calculate CPI:
Inflation rate of period T = (CPI of period T - CPI of period T-1) : CPI of period T-1
Although this formula might seem theoretical, it can be useful for anticipating changes in the market. But as a trader, what you need to know is how CPI is calculated, which is by determining the percentage of expenditure for each group of goods and services compared to the total expenses.
Typically, CPI is calculated monthly and annually, and you can keep up with CPI changes by tracking an expected economic calendar. So, even if you’re not an economist, it could be useful to have a toehold on this essential indicator when trading regularly.