Few economic releases move the stock market as reliably as inflation data. On the morning a hot or cool inflation number is published, stock futures, Treasury yields, and the dollar can all swing within seconds. Yet there are two main inflation measures in the US, and they do not always tell the same story.
The Consumer Price Index (CPI)
The CPI is published monthly by the Bureau of Labor Statistics (BLS). It measures the change in prices paid by urban consumers for a fixed basket of goods and services, from groceries and gasoline to rent, medical care, and airline fares. Because it arrives earlier in the month than PCE and gets heavy media coverage, CPI day is often the bigger market event.
Housing is a large part of CPI. The index uses a measure called owners’ equivalent rent to estimate what homeowners would pay to rent their own homes. Because this component changes slowly, shelter costs can keep CPI elevated for months after market rents have cooled.
The PCE price index
The Personal Consumption Expenditures (PCE) price index is published by the Bureau of Economic Analysis (BEA) as part of its monthly personal income and outlays report. It covers a broader range of spending, including purchases made on behalf of households, such as employer-paid health insurance and Medicare.
PCE also updates its weights as consumers shift their spending. If beef gets expensive and people buy more chicken, PCE captures that substitution more quickly than CPI. For this and other methodological reasons, PCE inflation has historically tended to run somewhat below CPI inflation.
Most importantly for investors, the Federal Reserve defines its 2% inflation goal in terms of PCE. That makes PCE the Fed’s preferred gauge, even though CPI often gets more attention on release day.
Headline vs. core
Both reports come in two main flavors. The headline number includes everything. The core number excludes food and energy, whose prices can swing sharply because of weather, geopolitics, or supply disruptions. Economists and Fed officials focus heavily on core inflation because it gives a clearer view of underlying price pressure.
Analysts also slice the data further, looking at goods versus services, shelter versus everything else, and “supercore” measures that strip out housing from core services to focus on labor-intensive categories linked to wage growth.
Why the surprise matters more than the level
Before each release, economists publish forecasts and a consensus estimate forms. Markets price that consensus in advance. If core CPI rises 0.3% month over month and 0.3% was expected, the reaction may be muted even if 0.3% is historically high. If 0.2% was expected, the same reading is a hawkish surprise.
A hotter-than-expected print typically pushes Treasury yields up, as investors expect the Fed to keep rates higher for longer, and weighs on rate-sensitive stocks. A cooler print tends to do the opposite. Watch the monthly change as well as the year-over-year rate, because markets focus on the recent trend.
Reading an inflation report like an investor
- Check the core month-over-month change against consensus first.
- Look at what drove it. A spike in one volatile category, such as airfares or used cars, is less meaningful than broad-based increases.
- Watch the two-year Treasury yield for the market’s read on Fed implications.
- Remember revisions. PCE data for prior months are often revised, which can change the trend.
For more on how inflation feeds into policy decisions, see our guide to how the Fed sets interest rates.
