What is CPI, and who publishes it?
The Consumer Price Index measures the average change over time in the prices consumers pay for a basket of goods and services, from food and rent to cars, medical care and airline fares. In the United States the Bureau of Labor Statistics (BLS) publishes it every month at 8:30 a.m. ET, usually in the first half of the month after the one it measures. The headline index, CPI-U, covers urban consumers, who make up more than 90% of the US population.
Core CPI is the same index without food and energy. Food and fuel prices jump around with harvests, weather and oil markets, so many investors watch core CPI for the underlying trend. The Federal Reserve’s 2% goal is defined with a different measure, the PCE price index from the Bureau of Economic Analysis, but CPI comes out first and often moves markets more.
- Consumer Price Index (CPI)
- A monthly measure, from the US Bureau of Labor Statistics, of the average change in prices that consumers pay for a basket of goods and services. Its yearly change is the most quoted inflation rate.
- Core CPI
- The Consumer Price Index excluding food and energy, whose prices swing widely. Investors watch it to see the underlying trend of inflation.
- Headline inflation
- Inflation measured on all items, food and energy included. It is what most news reports quote, and it can differ a lot from core inflation in a given month.
Month over month vs year over year: how do you read a CPI report?
A CPI report gives two main numbers. The month-over-month change compares the index with the previous month; the year-over-year change compares it with the same month a year earlier. Markets usually react to the monthly figure, core above all, because it is the newest information; the yearly figure moves slowly because eleven of its twelve months are already known.
Monthly numbers look small, but they compound. In the hypothetical drawing below, twelve monthly changes between 0.1% and 0.4% add up to +3.1% over the year. The last three months, 0.3%, 0.4% and 0.4%, run at about 4.5% a year when annualized, faster than the yearly figure suggests. A steady 0.3% a month comes to about 3.7% a year, which is why one tenth of a percentage point can matter on release day. Monthly figures are seasonally adjusted, and earlier months can be revised.
- Month over month (m/m)
- The change in a figure from the previous month. For CPI it is the newest reading of inflation, and markets react to it first.
- Year over year (y/y)
- The change in a figure from the same month a year earlier. It smooths out monthly noise and seasonal effects, but it is slow to show a change in trend.
How does the CPI report move stocks? The surprise, not the level
By 8:30 a.m. ET, economists’ forecasts are already in prices, so the market reacts to the surprise: actual minus forecast. The economic calendar explains where the forecast comes from and how the first minutes trade; this section is about why inflation surprises matter so much for stocks.
The link runs through interest rates. Futures markets price the odds of the Federal Reserve’s next decisions, and a CPI surprise can change those odds within minutes. In the drawing at the top of the page, core CPI is forecast at +0.3% for the month. In the hypothetical in-line case, the priced odds of a rate cut stay at 50%. A cooler +0.1%, a surprise of −0.2 points, lifts them to 70%; a hotter +0.5%, a surprise of +0.2 points, cuts them to 30%. Higher odds of lower rates tend to support stocks, rate-sensitive and long-duration growth stocks most, and lower odds tend to weigh on them.
These are tendencies, not rules. A cool report can be read as a sign of a weakening economy, a hot one can arrive alongside strong earnings, and details such as shelter costs or revisions can outweigh the headline. Bond yields often react first; bond yields and stocks explains why yields matter for valuations.
Which sectors are hurt or helped by inflation?
There is no fixed list, because it depends on why prices are rising and how the economy is doing. What matters most is pricing power: whether a company can raise its prices as fast as its costs. In the drawing below, two hypothetical companies each have revenue of 100 and costs of 80, and costs rise 6%. Company A raises its prices 6%, so profit grows from 20 to 21.2, +6.0%. Company B can raise prices only 2%, so profit falls from 20 to 17.2, −14.0%. Same inflation, very different results.
Rather than assume, you can check which sectors are actually leading with the tools in sector rotation. Tendencies that are often described, each with exceptions:
- Energy and materials producers can benefit when inflation comes from rising commodity prices, because those prices are their revenue.
- Companies with strong brands or few competitors may pass higher costs on to customers more easily.
- Businesses with thin margins and large wage or input costs, such as some retailers, restaurants and airlines, can see profits squeezed.
- Long-duration growth stocks tend to be sensitive to the higher yields that hot inflation can bring, because more of their value lies far in the future.
- Rate-sensitive sectors such as utilities and real estate often react to inflation news through its effect on bond yields.
- Pricing power
- A company’s ability to raise its prices without losing many customers. With rising costs, it decides whether profit margins hold or shrink.
What is a real return? What inflation does to your gains
A nominal return is the gain in dollars; a real return is the gain in purchasing power, after inflation. The exact formula is real return = (1 + nominal return) ÷ (1 + inflation) − 1. Nominal return minus inflation is a close shortcut when both numbers are small.
In the drawing below, $10,000 earns a hypothetical 8% in a year while prices rise 3%. The account shows $10,800, but in today’s money that is $10,800 ÷ 1.03 = $10,485, a real return of (1.08 ÷ 1.03) − 1 = 4.85%, a little less than the 5% shortcut. Over 10 years at the same rates, the account grows to $21,589, yet that is worth $16,064 in today’s money, and simply keeping pace with 3% inflation would have taken $13,439. Inflation never shows on a statement, but it decides what the money buys; for the growth side, see compound interest.
- Nominal return
- The return measured in money, before adjusting for inflation: what an account statement shows.
- Real return
- The return after inflation, measured in purchasing power: (1 + nominal return) ÷ (1 + inflation) − 1.
How do traders and investors handle CPI days?
A CPI release is a scheduled event: you know when the risk arrives, not which way it will go. Habits many traders use:
- Check the date and the forecasts for headline and core CPI at the start of the week; the BLS publishes its release schedule well in advance.
- Decide before 8:30 a.m. ET whether to hold through the number, and with what size; the position size calculator helps.
- Expect wider spreads and fast moves in pre-market trading and at the open.
- Read past the headline: core, shelter, services and revisions often decide whether the first move lasts.
- Remember why the report matters: it changes expectations for the next Fed meeting, so its effect fades if the Fed signals something else.
- For long-term investors, a single report usually matters less than inflation over years, through real returns.