Headline vs core
Two flavours. Both are reported.
- →Headline CPI — includes everything (food, energy, housing, services)
- →Core CPI — strips out food and energy, which are volatile
- →Markets typically focus more on core for the trend signal, but headline drives consumer expectations
Why markets care so much
Inflation shapes monetary policy, and monetary policy shapes every asset class.
- →Higher inflation → central banks raise rates → bond yields rise → bond prices fall
- →Higher rates → discount rates rise → growth stock valuations compress
- →Higher rates → currency strengthens vs lower-rate currencies
- →Bitcoin and gold often catch a bid on inflation surprises (or sell off, depending on the cycle)
How to read a print
CPI releases compare against consensus expectations.
- →Hotter than expected — bullish dollar, bearish duration (long bonds)
- →Cooler than expected — bearish dollar, bullish duration
- →In-line — usually a non-event unless components surprise
- →Watch shelter and services components — they drive the core trend