CPI, the Consumer Price Index, measures how much the cost of a representative basket of goods and services has changed over a period. It is the most widely watched measure of inflation, quoted either month over month or year over year, and it is published monthly by national statistics offices.

Why does CPI move currencies?

Because it determines what a central bank is likely to do with interest rates. A CPI surprise shifts expectations of the policy path, which moves short dated government bond yields, and the gap between two countries' yields is what prices a currency pair. The currency reaction to CPI is really a reaction to repriced rate expectations.

What is the difference between headline and core CPI?

Headline CPI includes all items. Core CPI excludes food and energy, because those are volatile and driven by supply factors that monetary policy cannot influence. Central banks weight core more heavily, so core surprises generally produce larger and longer lasting currency moves than headline surprises.

Why did the currency not move when CPI came in high?

Because markets price the forecast in advance, and only the gap between forecast and actual is new information. If inflation came in high but exactly as expected, nothing has been learned and there is nothing to reprice. The same applies when a print surprises but short dated bond yields do not move, which indicates the market does not think the policy path has changed.

Is CPI or PCE more important?

Both matter for different reasons. The US Federal Reserve formally targets PCE, so it is the measure the policy decision is officially judged against. CPI is released earlier and tends to move markets more on the day. PCE typically reads slightly lower than CPI because its basket adjusts as consumers substitute between goods.

Economic indicators

What is CPI, and why does it move currencies?

CPI, the Consumer Price Index, measures how much the cost of a typical basket of goods and services has risen over a given period. It is the most watched inflation measure in the world, and in currency trading it matters for one reason above all others: it is the number that decides what a central bank does next.

That is the whole of why a CPI release moves a currency within seconds. Traders are not repricing the cost of groceries. They are repricing the probability that the central bank raises, holds or cuts interest rates, because interest rates are what make one currency more attractive to hold than another.

The short version: CPI does not move the currency. It moves the expectation of what the central bank will do, and that moves the currency. When a strong CPI print fails to shift rate expectations, the currency move usually fades within the day.

What the number actually measures

A statistics office picks a basket meant to represent what households actually buy: food, housing, transport, energy, clothing, services. Each item is weighted by how much of a typical budget it takes up, so a change in rent counts for far more than a change in the price of postage. Every month, prices are collected and the basket is repriced.

CPI is that basket's cost expressed as a change. You will see it quoted two ways, and the difference matters:

Quoted as	What it means	What it is good for
Month over month (MoM)	Change since last month	Momentum. Catches a turn early, but noisy.
Year over year (YoY)	Change since the same month last year	The headline everyone quotes. Smoother, but slow to turn.

The two can disagree and often do. Year over year inflation can keep falling for months while month over month inflation has already turned back up, simply because a large increase from a year ago is dropping out of the comparison. That effect has a name, base effects, and it is one of the most common ways a headline number misleads.

Headline versus core, and why core usually wins

Headline CPI includes everything. Core CPI strips out food and energy.

That sounds like removing the parts people care about most, and in a sense it is. The reason central banks look past them is that food and energy prices are volatile and are driven by things monetary policy cannot touch. A cold winter or an oil supply shock will move headline inflation sharply, and raising interest rates does nothing about either. What a central bank can influence is the slower, stickier inflation running underneath.

Which one moves the market

Usually core, and by a wide margin. If headline comes in hot on an energy spike while core lands on forecast, expect a small and short lived currency reaction. If core surprises and headline does not, the reaction is generally larger and lasts longer, because core is what the policy decision keys on.

Services inflation within core is watched even more closely than core itself, because it is the component most tied to wages and the hardest to bring down.

Why the forecast matters more than the number

This is the part that confuses people new to trading data, and it is the single most important thing on this page.

A currency does not respond to whether inflation is high or low. It responds to whether inflation is higher or lower than the market already expected. Expectations are priced in before the release. Only the gap between the forecast and the actual print is new information, and only new information moves a price.

This is why 3.1% inflation can send a currency sharply higher on one occasion and leave it flat on another. If the consensus was 2.9%, that is an upside surprise and rate expectations shift. If the consensus was 3.1%, nothing has been learned and there is nothing to reprice.

CPI surprise → Rate expectations → Bond yields → Currency

You can watch this chain happen. The clearest confirmation that a CPI print was genuinely important is not the currency move at all, it is whether short dated government bond yields moved with it. Two year yields track rate expectations closely. If CPI surprised and the two year yield did not budge, the market has decided the print does not change the policy path, and the currency move will usually unwind.

Reading a print in practice

Four questions, in order. They take about thirty seconds once the habit is there.

Against forecast, not against zero. Was it above or below consensus, and by how much relative to how much this series normally moves? A 0.1 percentage point miss on a stable series is meaningful. The same miss on a volatile one is not.
Core or headline? Check which one carried the surprise. If they disagree, core is the one to weight.
Which direction does it push the bank? Higher inflation argues for tighter policy, which generally supports the currency. Lower argues for easing, which generally weighs on it. This is the step where people skip straight to a trade and get caught out.
Did yields agree? If the two year yield moved in the same direction, the market believes it. If not, be careful.

The part specific to forex: there are two of them

A currency pair is a ratio between two economies, so there are always two inflation stories running and the pair prices the difference between them.

A hot US CPI print is not automatically dollar positive against every currency. It is dollar positive against a currency whose own central bank is standing still. If the eurozone published an equally hot print the same week, the expected policy paths move together, the rate differential barely changes, and EUR/USD may go almost nowhere despite two dramatic headlines.

This is why reading one side leaves you guessing. The number that prices the pair is the gap, and a gap needs both sides. It is the same point made at more length in what market context means in trading.

Common traps

Trading the headline before the detail. The first move on a release is often reversed within minutes once the composition is read.
Ignoring revisions. A strong print alongside a downward revision to last month may be no acceleration at all.
Forgetting the meeting calendar. A CPI print two days before a policy decision carries far more weight than the same print the week after one.
Treating every country's CPI as equivalent. Different baskets, different methods, different release lags. They are not directly comparable levels, only comparable directions.

Related terms

PCE is a different inflation measure, and the one the US Federal Reserve formally targets. It uses a basket that adjusts as consumers substitute between goods, so it usually reads slightly lower than CPI. CPI is released earlier and moves markets more; PCE is what the decision is officially judged against.

PPI measures prices at the producer level rather than the consumer level. It is sometimes treated as a leading indicator for CPI, though the relationship is looser than it is often claimed to be.

Core inflation is any inflation measure with volatile components removed. Core CPI is the common one, but central banks watch several.

Keep reading

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