Macro
Intermediate4 Min Read
Inflation Data: CPI, Core and PCE
Why a number published once a month reprices every asset there is.
One of the two most awaited monthly releases in the US market is inflation (the other is jobs). The reason is indirect: inflation determines what the Fed does; the Fed sets rates; rates set everything.
Why Food and Energy Get Removed
It feels backwards: food and fuel are what people notice most. But those two items swing with weather and geopolitics. A cold snap or an oil supply cut pushes headline inflation up for a few months, then lets it fall back.
The central bank looks at the persistent trend, because a rate decision takes months to reach the economy. Reacting to a temporary spike with a hike would be an error whose effect arrives only after the spike has passed.
CPI vs. PCE
| CPI | PCE | |
|---|---|---|
| Published by | Bureau of Labor Statistics | Bureau of Economic Analysis |
| Basket | Fixed weights | Includes behavioral shifts |
| Housing weight | Higher | Lower |
| Usually | Prints a bit higher | Prints a bit lower |
| Used by | Media, contracts, wage talks | The Fed |
PCE accounts for substitution: when beef gets expensive, people switch to chicken, and PCE reflects it. CPI, with its fixed basket, doesn't see the switch.
The Fed's 2% target is defined on core PCE. Checking headline CPI and declaring "target missed" is reading the wrong thermometer.
How to Read a Release
Every release carries four numbers, and the market compares all four:
| Number | Meaning |
|---|---|
| Monthly headline | Versus the previous month |
| Annual headline | Versus the same month last year |
| Monthly core | Ex food and energy, monthly |
| Annual core | The single most watched number |
How the Market Reacts
If inflation comes in above expectations:
- Treasury yields rise (the Fed stays tight for longer)
- Growth stocks fall
- The dollar strengthens
Below expectations — the exact reverse.
The size of the reaction scales with the surprise, and the surprise is measured in decimals: a 0.1-point miss on annual core can move the index a full percent.