The Barometer of Price Fluctuations: An In-Depth Analysis of How the Consumer Price Index (CPI) Affects Investments

Why Must Investors Pay Attention to What CPI Is?

When discussing price trends, one of the most concerned topics for investors is the Consumer Price Index (CPI). Recently, CPI data released by various countries has triggered market volatility, but many people still have a vague understanding of this economic indicator. What is CPI? In simple terms, it is a core indicator that measures changes in the prices of goods and services in daily life, directly reflecting the actual inflation situation.

Starting from the Basics: Understanding CPI

CPI (Consumer Price Index) is a macroeconomic indicator used to track changes in the prices paid by the average household for goods and services. Price fluctuations in essentials like food, transportation, housing, medical care, and other goods and services are included in CPI calculations.

When CPI rises, it indicates that prices are increasing; when CPI falls or turns negative, it means prices are decreasing. This index reflects a fundamental phenomenon: whether the amount of goods you can buy with one dollar this year has increased or decreased compared to last year.

Rapid CPI growth can cause problems—reducing consumers’ real purchasing power and increasing living costs. But too low CPI is also problematic, as it can squeeze corporate profits, stall wage growth, and ultimately dampen consumer spending. Therefore, governments and central banks closely monitor CPI data and adjust economic policies accordingly, which in turn can indirectly influence stock markets, forex markets, and other investment arenas.

How Is CPI Calculated?

Understanding the calculation logic helps better interpret CPI data.

Step 1: Define the shopping basket. Statistical agencies select representative goods and services that reflect consumers’ daily expenditures, forming a “shopping basket.”

Step 2: Collect price data. Regular surveys are conducted to gather actual transaction prices of these goods and services in the market.

Step 3: Assign weights. Not all goods are equally important; for example, food and energy have a larger impact on the average household budget and thus receive higher statistical weights.

Step 4: Calculate price changes. Compare current prices with a base year (usually set at 100) to derive price indices for each item and service.

Step 5: Aggregate to produce the final CPI. Using the price indices and weights, a weighted calculation produces the overall CPI data.

When Is CPI Released? Why Do Investors Need to Pay Attention to the Release Time?

In Taiwan, CPI data is usually released once a month, on the first working day of the month or close to it. This monthly release schedule allows market participants to stay updated on the latest price trends.

When CPI is announced, statistical agencies typically provide detailed sub-item data, including price changes across various categories, core CPI trends, and more. For investors, the CPI release date is often a key point on the trading calendar—an important window for the market to access official price information, which can trigger fluctuations in stocks, forex, commodities, and other asset prices.

What Are the Main Factors Driving Changes in CPI?

CPI does not appear out of thin air; multiple economic forces work together to influence prices:

Supply and demand imbalance: When supply shortages or demand surges occur, merchants tend to raise prices, directly pushing CPI higher.

Monetary policy: Decisions by central banks to increase or decrease market liquidity directly impact price levels. An accommodative monetary environment tends to raise prices, while a tightening environment has the opposite effect.

Energy prices: Rising costs of energy commodities like oil and natural gas increase transportation and production costs, which then elevate retail prices across various goods.

Labor costs: When wages rise, companies often pass some of these costs onto consumers, leading to higher prices for goods and services.

Tax policy adjustments: Changes in VAT, consumption taxes, and other levies directly alter the final prices of consumer goods.

These factors often intertwine, creating a complex landscape of price movements.

Short-term and Long-term: The Dual Impact of CPI on Investment Markets

Long-term perspective: Asset allocation considerations

Inflation erodes the purchasing power of money, so long-term investors need to build portfolios that can hedge against inflation. Certain asset classes—such as real estate, dividend-paying stocks, and mortgage-backed securities—tend to perform relatively resiliently in high-inflation environments due to their inflation-hedging characteristics.

Short-term shocks: Triggers for market volatility

Stock Market: Rising CPI may trigger concerns about corporate profit prospects. Inflation increases production costs, squeezing corporate net profits, and putting downward pressure on stock valuations.

Forex Market: An increase in CPI often signals a decline in the country’s currency purchasing power, leading to depreciation of that currency on the international market and affecting exchange rates.

Commodity Market: Inflation is associated with rising prices of commodities. When CPI data is released, prices of oil, metals, agricultural products, and other commodities often fluctuate accordingly.

The Hidden Connection Between CPI and the Stock Market

Although CPI and the stock market belong to different market systems, their relationship is more intertwined than it appears.

During periods of monetary easing, bank interest rates are low, reducing the attractiveness of savings. Capital flows into stocks and real estate, pushing asset prices higher. But when CPI continues to rise, governments and central banks are forced to tighten monetary policy by raising interest rates—at which point the stock market often faces correction, as higher borrowing costs weaken corporate and investor purchasing power.

In short, through the intermediary of monetary policy and capital supply, changes in CPI data ultimately translate into stock market rises and falls.

CPI and Inflation: Two Sides of the Same Coin

Many people associate price changes with a straightforward perception: the same amount of money could buy many things a few years ago, but now can only buy one or two items. This is the core of inflation—continuous and widespread increases in the prices of goods and services, leading to a decline in the purchasing power of each unit of currency.

CPI plays a key role in determining whether inflation exists. Moderate inflation (often called mild inflation) can encourage consumption and investment, promoting economic growth. But runaway hyperinflation can rapidly erode asset values and disrupt financial plans.

To cope with inflation, investors should optimize income structures, increase the proportion of non-wage income (such as investment returns), and diversify assets to protect wealth.

How to Apply CPI Data When Developing Investment Strategies?

Monitor inflation expectations: Before investing, analyze market expectations for inflation. Since inflation impacts portfolios over the long term, establishing a macroeconomic framework is essential.

Use CPI to predict trends: Rising CPI often indicates accelerating inflation. Investors can adjust their portfolios in advance based on CPI trends, such as increasing allocations to inflation-hedging assets (commodities, real estate, high-dividend stocks).

Analyze CPI components carefully: Don’t just look at the overall CPI; pay attention to:

• Year-over-year change: The difference compared to the same period last year, reflecting true inflation trends.
• Core CPI: CPI excluding food and energy, which tend to be more volatile. Core CPI provides a more accurate measure of underlying inflation pressures.

When core CPI continues to rise, it usually signals deeper inflationary pressures; if it remains stable or declines, the increase may be temporary.

Investment decisions should also consider other economic indicators, industry outlooks, market risk appetite, and multiple factors to avoid relying solely on CPI data.

How Does the US CPI Affect Taiwanese Investors?

As the world’s largest economy, changes in US CPI influence global markets, and Taiwanese investors need to pay close attention.

Trade competitiveness: Rising US inflation often leads to a weaker US dollar, which can diminish Taiwan’s export competitiveness relative to other countries, affecting industries like electronics manufacturing and raw material exports. Investors should monitor US trade policy changes and consider shifting toward sectors driven more by domestic demand.

Exchange rate fluctuations: An increase in US CPI may trigger US dollar depreciation. This directly impacts import costs, overseas investment returns, and dollar-related business operations. Investors can consider using foreign exchange derivatives to hedge risks or increase holdings in local currency assets to reduce exchange rate exposure.

Global market sentiment: US CPI data often serve as a trigger for global risk appetite adjustments. Rising US prices can lead to shifts in global capital flows, influencing Taiwan’s stock market, real estate, and other capital markets. Building a diversified, cross-border, multi-asset portfolio can help mitigate single-market risks.

Effective responses involve maintaining sensitivity to the global economic pulse and adjusting strategies appropriately before and after CPI releases, with flexible capital allocation across different markets.