Price Trend Indicator: Understanding How the CPI Index Influences Your Investment Decisions

Recently, CPI data has been released across various regions one after another. This seemingly cold economic indicator actually touches every nerve of the investment market. The Consumer Price Index (CPI) is not just a statistical figure; it directly reflects the temperature of the economy and influences the rise and fall of the stock market, foreign exchange market, and commodities.

What exactly does the CPI measure?

The CPI, or Consumer Price Index, is a macroeconomic barometer that tracks changes in the prices of goods and services purchased by households. In simple terms, it weaves the price fluctuations of daily necessities such as food, clothing, housing, and transportation into a curve used to determine whether prices are rising or falling.

The CPI index starts at 100 points in the base year and rises or falls over time. When the CPI increases, it indicates a general rise in prices, squeezing residents’ purchasing power; conversely, if the CPI decreases or turns negative, it signals deflation.

This seemingly simple numerical change hides complexity—if CPI growth exceeds income growth, living costs increase; if CPI is too low, it can drag down corporate profits and employment prospects. Therefore, fluctuations in the CPI not only influence central bank policies but also indirectly rewrite the winners and losers in the investment market.

How is the CPI calculated? Step-by-step breakdown

Constructing the CPI involves five key steps:

Step 1: Basket of goods fixed. Statistical agencies select representative goods and services to form a “consumption basket,” which includes items that are main expenses for ordinary people.

Step 2: Price data collection. Real-time prices of these goods and services are gathered through nationwide surveys.

Step 3: Weight assignment. Not all items are equally important; agencies assign different weights based on actual consumer expenditure proportions, with essentials like food and energy typically having higher weights.

Step 4: Item-by-item comparison. Prices of each good and service are compared to those in the base year to calculate individual price indices.

Step 5: Weighted averaging. All item indices are summed according to their weights to produce the final CPI.

When is the CPI released? Key timing for investors

In Taiwan, CPI data is released once a month, usually on the first working day or the closest working day. This frequency ensures investors can timely capture price trends.

When the statistical agency releases the CPI, it provides a detailed report including overall CPI changes, price movements of various goods and services, and professional interpretations. For investors, this timing often coincides with market volatility, as CPI data directly influences expectations about economic trends and central bank policies, thereby affecting the performance of different asset classes.

The five main drivers pushing CPI upward

CPI does not change arbitrarily; multiple forces drive its movement:

Supply and demand imbalance. When supply is tight or demand surges for certain goods, prices naturally rise, pushing CPI higher.

Monetary policy shifts. When the central bank increases money supply or lowers interest rates, market liquidity increases, often leading to rising prices.

Energy price fluctuations. Rising oil and gas prices directly increase production costs, which are eventually passed on to goods and services, exerting the most direct impact on CPI.

Rising labor costs. When wages increase, companies pass the costs onto consumers, raising prices of goods and services.

Tax policy adjustments. Changes in VAT, consumption taxes, etc., directly alter product prices, causing immediate CPI impacts.

The real threat of US CPI fluctuations to Taiwanese investors

The US is the global economic engine, and fluctuations in US CPI not only influence the US market but also have layered effects on Taiwan’s market and investors.

Export competitiveness pressure

If high US CPI causes the US dollar to depreciate, Taiwanese goods may lose price competitiveness internationally. Export-dependent industries like electronics manufacturing and precision machinery could see profit margins squeezed, and related stock prices may face adjustments.

Exchange rate volatility risk

Changes in US CPI influence the US dollar’s strength. When the dollar weakens, the Taiwan dollar tends to appreciate, reducing import costs but also shrinking export revenues; the opposite occurs when the dollar strengthens. This causes fluctuations in the book values of import/export companies and overseas investments.

Global capital flow shifts

US CPI data affects global risk appetite. When markets expect persistent high inflation in the US, capital may flow back from emerging markets to developed countries, leading to capital outflows from Taiwan’s capital markets.

The hidden connection between CPI and the stock market

In theory, there is no direct functional relationship between CPI and stock market movements, but they are closely linked through the invisible channel of capital flow.

In a loose monetary environment with low interest rates, savings are less attractive, and social funds tend to flow into stocks and real estate, pushing up prices. However, when CPI continues to rise and the central bank shifts to tightening policies, increasing borrowing costs, the stock market undergoes structural adjustments, especially impacting overvalued and unprofitable stocks.

Inflation and CPI: two sides of the same coin

Inflation is the phenomenon of currency depreciation and shrinking purchasing power. Money that could buy ten items before now only buys two—that’s the intuitive feeling of inflation.

How to tell if you are in inflation? Just look at the CPI. Usually, when CPI continues to rise and prices generally increase, it indicates inflation. Mild inflation can promote economic growth, but hyperinflation erodes asset values. Investors need to increase their proportion of asset income and optimize income structures to counteract inflation.

How should investors respond to CPI changes?

Closely monitor inflation expectations. CPI data has a continuous impact on investment portfolios; investors should stay updated on macroeconomic inflation trends.

Use CPI to predict inflation trends. Rising CPI may signal accelerating inflation; at this point, consider increasing allocations to inflation-hedging assets such as commodities, real estate, and high-dividend stocks.

Deeply interpret CPI data. Focus on the annual change rate and core CPI. The annual change reflects overall price trends, while core CPI excludes volatile items like food and energy, providing a more accurate measure of underlying inflationary pressure. Comparing CPI data with market expectations helps determine whether inflation is exceeding forecasts, enabling timely portfolio adjustments.

Deep dive into CPI: core CPI and short-term fluctuations

Core CPI excludes food, energy, and other volatile items because these are susceptible to seasonal, climatic, and external factors, and do not represent underlying inflation levels. Accurate inflation prediction requires paying close attention to core CPI changes.

Short-term CPI fluctuations reflect recent economic activity, driven by supply and demand, price swings, and other factors. Investors should continuously track the latest CPI changes and trends rather than relying solely on monthly data.

When formulating investment strategies, CPI is just one reference point; comprehensive decisions should consider other economic indicators, market trends, industry prospects, and multiple factors to develop a well-rounded investment plan.