Consumer Price Index (CPI) and Core CPI Overview

Consumer Price Index (CPI) and Core CPI Overview

Date: February 12, 2025, 01:30 PM GMT / 09:30 AM Eastern / 08:30 AM Central

Core CPI (m/m): The Core Consumer Price Index measures monthly changes in the price of goods and services, excluding food and energy. This metric provides a clearer understanding of underlying inflation trends by excluding the more volatile food and energy prices.
CPI (m/m): The Consumer Price Index measures monthly changes in the price of a basket of goods and services from the consumer's perspective. It includes all items, offering a broader measure of inflation compared to Core CPI.
CPI (y/y): The Consumer Price Index measures annual changes in the price of a basket of goods and services. This provides an annualized rate of inflation, indicating how prices have evolved over the past year.

Expected Data for January 2025

Importance of CPI Data to the Federal Open Market Committee (FOMC)

The Federal Open Market Committee (FOMC) closely monitors CPI data due to its significant implications for inflation trends, which are central to the FOMC’s dual mandate of promoting maximum employment and stable prices. Key reasons for the FOMC’s focus on CPI data include:

1. Inflation Monitoring:CPI data enables the FOMC to track inflation levels and trends, assessing whether inflation is under control or rising too rapidly.
2. Monetary Policy Decisions: The FOMC relies on CPI data to make informed decisions regarding monetary policy, including setting interest rates. High inflation may prompt the FOMC to raise interest rates to cool the economy, while low inflation might lead to rate cuts to stimulate economic activity.
3. Economic Stability: Controlling inflation is crucial for economic stability. High inflation can erode purchasing power and create uncertainty, while low inflation can result in 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. Higher-than-expected inflation 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 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 offset the loss of purchasing power. Conversely, lower inflation can lead to lower yields.
2. Stock Markets: Inflation data influences stock prices. Higher inflation may raise concerns about rising costs for businesses, squeezing profit margins and resulting in lower stock prices. Conversely, lower inflation can be positive for stocks, indicating 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, strengthening 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 broader impact can affect 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 USD-based currencies fall, USD-quoted currencies may rise, commodities may rise, equity markets may rise, and emerging markets may fall.