The CPI and Core CPI

January 15, 2025, 01:30 PM GMT / 09:30 AM Eastern / 08:30 AM Central

Core CPI (m/m): The Core Consumer Price Index measures the changes in the price of goods and services, excluding food and energy, on a month-over-month (m/m) basis. This metric provides a clearer picture of underlying inflation trends by excluding the often-volatile food and energy prices.
CPI (m/m): The Consumer Price Index measures the changes in the price of a basket of goods and services from the perspective of the consumer on a month-over-month (m/m) basis. It includes all items, offering a broader measure of inflation compared to Core CPI.
CPI (y/y): The Consumer Price Index measures the changes in the price of a basket of goods and services on a year-over-year (y/y) basis. This provides an annualized rate of inflation, showing how prices have changed over the past year.

Expected Data for December 2024

These expectations reflect the anticipated changes in prices for goods and services, excluding food and energy for Core CPI, and including all items for CPI.

Why the FOMC Cares About This Data

The Federal Open Market Committee (FOMC) closely monitors CPI data because it provides crucial insights into inflation trends, which are central to the FOMC’s dual mandate of promoting maximum employment and stable prices. Here’s why CPI data matters to the FOMC:

1. Inflation Monitoring: CPI data helps the FOMC monitor inflation levels and trends. By understanding how prices are changing, the FOMC can assess whether inflation is under control or if it's rising too quickly.
2. Monetary Policy Decisions: The FOMC uses CPI data to make informed decisions about monetary policy, including setting interest rates. If inflation is high, the FOMC may raise interest rates to cool down the economy. Conversely, if inflation is low, it may lower interest rates to stimulate economic activity.
3. Economic Stability: Keeping inflation in check is essential for economic stability. High inflation can erode purchasing power and create uncertainty, while low inflation can lead to deflation and economic stagnation. The FOMC aims to maintain a balance to support sustainable economic growth.
4. Market Expectations: CPI data influences financial markets and investor expectations. If CPI data shows higher-than-expected inflation, it can lead to market volatility and impact investment decisions. The FOMC's actions in response to CPI data can help manage these expectations and maintain market confidence.

Impact on Financial Markets

The release of Consumer Price Index (CPI) data typically has several key impacts on financial markets:

1. Bond Markets: CPI data can significantly affect bond yields. Higher-than-expected inflation often leads to higher bond yields, as investors demand greater returns to compensate for the loss of purchasing power. Conversely, lower inflation can lead to lower yields.
2. Stock Markets: Inflation data influences stock prices. Higher inflation may lead to concerns about rising costs for businesses, which can squeeze profit margins and result in lower stock prices. Conversely, lower inflation can be positive for stocks, as it may indicate stable costs and potential for lower interest rates.
3. Currency Markets: CPI data can impact the value of the US dollar. Higher inflation may lead to expectations of interest rate hikes by the Federal Reserve, which can strengthen the dollar. Lower inflation might have the opposite effect.
4. Interest Rate Expectations: Investors closely watch CPI data to gauge future actions by the Federal Reserve. Higher inflation data can lead to expectations of interest rate increases, while lower inflation might lead to expectations of rate cuts or stable rates.
5. Consumer Sentiment: High inflation can erode consumer purchasing power, leading to lower consumer confidence and spending. This can have a broader impact on the economy and financial markets.
6. Market Volatility: The release of CPI data can lead to increased market volatility as investors react to the new information and adjust their positions accordingly.

Key information

Expected Impact

Lesser-than-expected inflation will reduce the likelihood of rate cuts, which could weaken the currency. If the USD-based currency falls, USD-quoted currencies rise, commodities rise, equity markets rise, and emerging markets fall.