Business owners and consumers alike can describe the impacts of inflation. When prices rise, it risks profits, and customers have to devote more of each paycheck toward their basic needs. While inflation’s negative impacts are clear, measuring inflation isn’t as simple. The most popular figure to use is known as the Consumer Price Index (CPI). Here’s what you need to know about the CPI, how it measures inflation and other tools you can use for more context.
|Month over month (seasonally adjusted)||Year over year (unadjusted)|
|Services (excluding energy)||0.70%||5.50%|
The latest CPI data saw broad price increases throughout the economy in June 2022. The topline year-over-year figure was 9.1%. In other words, the average price consumers paid for goods and services increased by 9.1% in June 2022 compared to June 2021. That marks the largest 12-month price increase since November 1981.
The top sources of inflation included energy, food and housing.
On a month-by-month basis, the June 2022 CPI increased 1.3% over the May 2022 CPI. That’s the highest monthly spike so far this year, although March 2022 came close at 1.2%. After that March peak, a low of 0.3% followed in April 2022, but prices have steadily climbed since then.
Inflation in the energy sector has outpaced all other sectors throughout 2022. The sector as a whole has experienced more than 40% inflation between June 2021 and June 2022. This included a nearly 100% increase in the price of oil.
The energy sector is much more volatile than other sectors. Prices for oil and gas experience massive upswings as well as steep declines. This makes trends more important than any single data point.
Monthly data reveal a more nuanced story than the annual data, although uptrends clearly remain intact. For example, energy services saw a 1.2% month-over-month decrease, but that deflation was offset in the energy sector by price hikes of more than 10% in oil and gas.
In total, the CPI for energy rose 7.5% over May 2022 levels. That’s a bit below 2022’s high of 11% in March, but it’s well above the low of -2.7% in April.
For small businesses, this translates to higher costs for deliveries. If you depend on deliveries or manage a fleet of vehicles, you might consider ways to reduce your fuel costs. Something as simple as keeping your tires properly inflated can improve your fuel efficiency by up to 3%. Other strategies include maintaining your oxygen sensor and using a telematics provider to track fuel consumption.
Food prices increased 1% in June 2022 compared to the prior month. That inflation rate is roughly in line with food inflation in recent months. Inflation was felt a bit more at the grocery store compared to restaurant meals, and that’s also typical of recent trends. Compared to last year, food prices have increased 10.4%.
Restaurants will feel the impact of this type of inflation most directly, but all small businesses will feel the impact to some extent. As such a basic necessity, food inflation is universally felt, even if it doesn’t show up as an item on your business’s balance sheet.
Outside of food and energy, inflation persists, but at a relatively more modest rate. Prices for goods and services increased 0.7% month over month in June. That’s the highest figure seen so far in 2022, but it’s less than 0.2% higher than the average rate seen in the six months beforehand.
In general, June’s CPI data suggests small businesses will continue to experience the impacts of widespread inflation. Despite volatility being largely concentrated in energy and food trends, goods and services throughout the economy are experiencing persistent inflation. During inflationary periods, it makes sense for business owners to scale back on debt, shop around for the best suppliers and look for any opportunity to improve efficiency.
The Bureau of Labor Statistics (BLS) conducts price surveys throughout the month and all across the country to determine changes to CPI. For the June 2022 report, the bureau tracked detailed expenditure information from 75 urban areas, including some 22,000 retail establishments and 6,000 housing units.
The BLS takes the data from these surveys and averages out the prices for a basket of goods and services. The basket is weighted to give extra importance to price changes that have the most direct impact on consumers. The BLS uses more than 200 specific categories, but these smaller categories fit broadly into eight larger groups: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and an “other” group.
CPI data accounts for taxes directly related to goods or services. For example, sales tax applies directly to the cost paid at the register, so the CPI includes it. Income taxes aren’t included because they aren’t tied to a specific purchase.
CPI data focuses primarily on consumers. The price changes are weighted to best reflect what consumers are buying and how much of it they buy. That can leave some data gaps for businesses when they face costs consumers don’t.
Wages are perhaps the best example. Wages are not paid by consumers, so wage inflation doesn’t factor into CPI readings. To ensure you’re paying your employees a wage commensurate with the competition – a key aspect of reducing employee turnover – you’ll need to track wage data separately.
CPI is a lagging indicator, as it measures what has already happened. Month-over-month data will be the first to show inflation or deflation, though trend changes will still lag behind reality. Annual data takes much longer to reflect changes.
The CPI helps businesses better understand their customers. It’s designed to be the best measurement of the direct impact inflation has on consumers. When the CPI increases, customers will likely already be feeling the effects of inflation, and they won’t be surprised when your prices start to rise.
Businesses can use this information to better plan which goods and services to offer, as well as the prices they can expect to receive. While they might accept higher prices, customers could scale back on their overall spending during inflationary periods. This is especially true during sluggish periods of stagflation, when rising inflation occurs at the same time as a slowing economy.
Employees will feel the impacts of CPI changes just like customers. That’s why employers may choose to peg wages to the CPI, or they may offer raises when CPI measurements get particularly high. Consider the CPI when determining salaries and wages for employees.
CPI data can also help businesses prepare for increasing costs from suppliers. If the CPI rises before a business notices its supplier raising rates, it may provide an opportunity to shore up finances and prepare for an eventual price hike.
The CPI is a useful tool, but it isn’t the only tool. Federal government agencies measure inflation in a few ways, and you can also track price changes occurring directly in the market through futures contracts. Together, these tools and others like them help businesses to prepare for changes in the rate of inflation.
Another BLS measurement, the Producer Price Index (PPI) focuses on the prices received for goods and services, rather than the prices paid by consumers. PPI data breaks down prices for goods by food, energy, and the total without food and energy. The services data separates transportation and warehousing from trade, and there’s also an “other” section. The PPI for June 2022 rose by 11.3% year over year and 1.1% month over month.
The Personal Consumption Expenditures (PCE) Price Index comes from the Bureau of Economic Analysis (BEA), but it’s very similar to the CPI measured by the BLS. The PCE Price Index uses slightly different formulas to capture consumer behavior and price. The Federal Reserve closely tracks PCE data, along with a Core PCE Price Index that excludes the most volatile prices (like fuel). The PCE in May 2022 increased 6.3% year over year and 0.3% month over month.
As the BEA’s featured inflation measurement, the Gross Domestic Purchases Price Index is a wide-ranging gauge of all prices paid in the U.S. This includes all purchases made in the U.S. by consumers, businesses and governments (federal, state and local). Purchase prices include imports from other countries. The Gross Domestic Purchases Price Index is measured quarterly, and it grew by 8% in the first quarter of 2022.
The Gross Domestic Purchases Price Index is different from gross domestic product (GDP). GDP measures the size of an economy. It provides helpful economic context, but it isn’t the best measure of inflation in and of itself.
If your business depends on a specific commodity, then you may prefer tracking the data most relevant to you in the futures market. For example, you may run a cafe that depends on coffee beans, in which case you can track coffee bean futures. If you build homes for a living, you may want to track lumber prices.
These futures contracts trade similarly to stocks, so they offer real-time snapshots of a commodity’s value. Keep in mind that traders may overreact to news events, so businesses shouldn’t read too much into short-term fluctuations. Futures work best as a supplemental analysis tool used between major inflation reports from government bureaus.
The BLS releases updated CPI figures in the second week of each month. For example, CPI data from July 2022 will be released on Wednesday, Aug. 10. These releases occur at 8:30 a.m. ET.