Consumer Price Index (CPI) is an important economic indicator. It measures the changes in the average price level of a basket of goods and services that are commonly purchased by households. In the opinion of Kavan Choksi, CPI tracks inflation and reflects the impact of price changes on the cost of living over time. CPI data is extensively used by central banks and governments to monitor economic stability, make monetary policy decisions and assess the purchasing power of the currency.

Kavan Choksi Briefly Underlines How CPI Affect Investors

The Consumer Price Index or CPI serves as an important gauge for inflationary trends in the economy. For instance, in case the CPI rises by 2% over the past year, it shall indicate that the cost of a basket of goods and services has gone up by the amount in the specific time period. As inflation goes up, it might lead investors to anticipate higher prices for discerning consumer goods and services down the line. This may trigger concerns in regard to reduced purchasing power. It might prompt investors to adjust their portfolios by selling off certain investments in order to account for higher amounts spent on consumer spending as well as corporate profitability. This may lower the stock market process owing to a fall in demand and vice versa. 

The CPI is closely linked to the overall economic health of an economy. It is common for investors to consider CPI trends when making stock market decisions. After all, it does provide insights into economic conditions and can influence sector allocations in their portfolios.

Inflation, tracked by the Consumer Price Index, directly affects the buying power of money. When inflation rises faster than wages or investment returns, the true value of savings and investments declines. For example, if the CPI rises by 3% while investments yield only 2%, investors face a decrease in purchasing power. To protect against this erosion, investors may look to assets that historically exceed inflation, such as stocks or real estate, which can drive up their market prices accordingly.

As per Kavan Choksi, central banks usually use CPI data in order to set monetary policy, especially in regard to interest rates. For instance, if the CPI goes up considerably above the target rate of the central bank, it might prompt policymakers to raise interest rates in order to curb inflation. Higher interest rates can augment consumer and business borrowing expenses, and lower consumer spending and capital investments. Therefore, stock markets may experience lower demand for equities, as well as lower stock market prices on the whole. The opposite of this tends to happen if the interest rates are lowered due to low CPI.

Inflation can affect the cost structure of a company and ultimately its earnings as well, which can lead to fluctuations in its stock price. For instance, when inflation drives up costs for raw materials or wages, the profit margins of a company may decrease. In response, investors might choose to reassess their investments in these companies, potentially causing stock prices to drop. On the other hand, companies in sectors that can pass on higher costs to customers, such as certain utilities or those with strong pricing power, may perform better during inflationary periods, often leading to increased stock prices.