Trading Inflation Data: Consumer Prices (CPI), PCE and Producer Prices

What do inflation data measure?

Inflation data measure how much the prices of a fixed basket of goods rise or fall. The best-known figure is the consumer price index (CPI), in the euro area the Harmonised Index of Consumer Prices (HICP). They are complemented by the personal consumption expenditures (PCE) price index in the US and by producer prices, which show what companies charge for their goods.

Inflation data matter so much to traders because central banks react to them. Almost all major central banks aim for inflation of around 2%. If it is above that, higher rates or rates staying high for longer loom, and if it is below, cuts become more likely. An inflation surprise therefore shifts rate expectations immediately, and with them currencies, bonds, stocks and gold.

When are the most important inflation figures released?

Most countries report consumer prices monthly, a few weeks after the end of the month. The euro area and individual countries provide a flash estimate in advance.

In the euro area, large countries such as Germany, France and Spain report their preliminary figures before the flash estimate for the whole currency area. The market extrapolates from them in advance what to expect.

Which inflation figures are there?

Each inflation figure measures something different. For prices, what counts most is the figure the responsible central bank pays most attention to.

Core inflation: what is left out

The core rate is meant to show persistent price pressure. What is excluded differs by country. In the US, energy and food are left out, in the euro area also alcohol and tobacco. In Japan, the usual "core" rate excludes only fresh food; the rate excluding food and energy is reported as a separate figure. Australia and Canada also publish statistical core measures such as the trimmed mean.

The central banks' targets

The Fed targets 2% on the PCE price index, the ECB 2% on the HICP over the medium term, the Bank of England and the Bank of Japan 2% each on consumer prices. The Swiss National Bank equates price stability with inflation between 0 and 2%, and the Bank of Canada targets 2% at the midpoint of a range of 1 to 3%. The further a figure is from the target, the more weight a surprise carries.

How do you read inflation data?

Inflation comes out at the same minute in several versions: headline and core, month on month and year on year, partly as an index level. The market reacts first to the monthly core rate against the consensus, because it shows current price pressure most directly.

• Month vs year: the yearly rate can fall even though the month was high, if an even higher month from the previous year drops out (base effect). The monthly rate is the fresher signal.
• Rounding: monthly rates are usually rounded to one decimal place. A reported value of 0.3% can be just above 0.25 or just below 0.35, which affects the reaction.
• Components: housing costs make up a large share of US consumer prices and react sluggishly. Many observers therefore also look at services excluding housing.
• Flash and final figure: the flash estimate moves prices, the final figure a few weeks later usually hardly at all, unless it deviates.
• Mixed signals: if the headline rate rises because of energy but the core rate does not, price pressure is narrow. The central bank will then tend to react with restraint.

The chain of effects: what an inflation surprise moves

Higher inflation than expected raises rate expectations, lower inflation lowers them. The other markets depend on this.

• Bonds: yields rise after an upside surprise, especially at short maturities.
• Currency: higher rate expectations tend to strengthen a currency. For a pair, what counts is whether the surprise hits one side harder than the other.
• Stocks and indices: higher rates weigh on valuations, especially for fast-growing companies. Lower inflation than expected usually helps stocks.
• Gold: in the long run, gold is seen as protection against inflation. In the short run, however, rates count: if real rates and the dollar rise after a surprise, that tends to weigh on gold.
• Cryptocurrencies: Bitcoin often reacts to US inflation like other risk assets: a higher figure than expected tends to weigh, a lower one tends to help.

When the chain breaks

• Supply shock: if inflation rises because of expensive energy, growth can suffer. The currency does not necessarily firm, because the central bank has to weigh inflation against the economy.
• Already priced in: if the euro-area country figures have already anticipated the flash estimate, the reaction stays small.
• Credibility: if the market does not believe the central bank will react to high inflation, a currency can weaken despite a high figure.

Inflation data or labour market data: which matters more?

That depends on where the central bank currently sees the greater risk. If inflation is well above target, price data dominate. If inflation is close to target and the labour market is weakening, the employment report moves to the fore. The Fed has both goals, price stability and employment, the ECB primarily price stability.

Teaching examples

The following cases are teaching examples with round numbers, not real releases, and give no price moves in pips or percent.

Teaching example 1: core rate above consensus

Expected are 0.2% month on month for the headline rate and 0.2% for the core rate. Reported are 0.2% and 0.4%. The headline rate is in line, the core rate surprises by 0.2 percentage points. Price pressure is broader than thought, rate expectations rise, and the currency tends to strengthen even though the headline looks unremarkable.

Teaching example 2: the country figures anticipate the euro area

In the morning, Germany and Spain report higher inflation than expected, and the euro is already reacting. At midday the flash estimate for the euro area comes out exactly at the level the country figures suggested. The consensus was too low, but the market had already priced in the surprise. The reaction to the euro-area figure stays small.

Teaching example 3: producer prices as a forerunner

Producer prices rise much more than expected, while consumer prices two days earlier were in line. The direct reaction remains muted, because the central bank looks at consumer prices. For the coming months, however, the rise suggests that companies could pass on higher costs.

Inflation data in each trading style

Inflation data are among the few releases that affect all timeframes: as a short spike for the scalper, as a trend signal for the position trader.

Inflation data in scalping (15m, 30m)

In scalping on 15m and 30m, US consumer prices are one of the most turbulent moments of the month. In the first minute spreads widen, and because headline and core come out at the same time, the price often swings both ways with mixed signals. Before the release the scalper is flat.

The earliest sensible entry is after the first closed 15m candle, once it is clear which figure the market weights more. A breakout from the range of this candle or the first pullback to the breakout level are the usual approaches, with the stop behind the range. US data at 8:30 a.m. New York time fall into the overlap of the London and New York sessions. They affect crypto just as much, even though Bitcoin trades around the clock.

Inflation data in day trading (1h, 2h)

In day trading on 1h and 2h, an inflation release often shapes the whole trading day. Before the release the day trader reduces open positions or trails the stop, and afterwards waits for the closed 1h candle. It shows whether the market accepts the surprise.

In the euro area, the inflation figures are spread across the morning, from the countries to the flash estimate. Anyone trading EUR pairs can use the country figures as a hint and the euro-area figure as confirmation. On the day of US consumer prices, the European afternoon is often the most active phase. Positions are closed before the end of the session.

Inflation data in swing trading (4h, 8h)

In swing trading on 4h and 8h, you usually hold through inflation data. The stop sits behind a real structure, and the position size is chosen so that a spike remains bearable.

More important than the first jump is whether the 4h and 8h candles after the release confirm the trend. A clear surprise in the core rate can start a new swing, because it changes the central bank's path. If inflation data come shortly before a central bank meeting, both releases act together, and the risk for a pair rises markedly that week.

Inflation data in position trading (12h, 1d)

In position trading on 12h and 1d, the trend over months counts. If core inflation falls step by step towards the target, rate cuts come closer, and the currency tends to lose its rate advantage. If it rises again, this reverses.

Single monthly figures are milestones at this level, not entry signals. The stop is far enough away that a single surprise does not reach it. In the FinScans cockpit, the news situation counts for more than the technicals on the long horizon, as the methodology on horizons explains.

Inflation data and technical signals

Around inflation data, many false signals appear. A break of a trendline or of a support and resistance level in the first minute is often just the swing of a mixed picture. Only the closed candle after the release shows whether the break holds.

FinScans signals exist for forex and crypto pairs. They are updated candle by candle and are often closed early when the market turns, as the methodology describes. Read a signal that appeared shortly before high-impact inflation data with caution.

How to use FinScans for inflation data

In the FinScans calendar, inflation figures appear in the category "Inflation", and the inflation releases in the calendar can be filtered on their own. A release often appears there as several rows at the same minute, for example headline and core rate, each month on month and year on year. The consumer prices of the major currency areas and, in the US, PCE and producer prices carry three dots for high impact.

In the cockpit, a heads-up at the overall assessment combines these rows, and the box "Economic data for …" assesses each figure. "Better than expected" refers to the currency, not to the economy: higher inflation than expected counts as better for the currency because it makes higher rates more likely. How reports about inflation feed into the news situation is described in the methodology on the news situation.

The next inflation releases and the most recently published values from the FinScans calendar:

Hybrid checklist: what the machine reports, what you check yourself

FinScans provides the release, consensus, previous value, actual value and the assessment for the currency. How broad the price pressure is, you judge yourself, as described in hybrid trading. Around inflation data, check:

1. Which inflation figure is decisive for the responsible central bank, and how far is it from the target?
2. Does the core rate deviate from the consensus, or only the headline rate?
3. Is the surprise in the monthly rate larger than the usual rounding?
4. Have country figures or producer prices already anticipated the surprise?
5. Is my position small enough and my stop set so that a swing in both directions remains bearable? More on this in risk management.
6. Does the reaction fit the news situation in the cockpit and the trend of the higher timeframe?

Frequently asked questions

What is the difference between CPI and PCE?

Both measure consumer prices in the US, but with a different basket and different weighting. The CPI from the Bureau of Labor Statistics comes out in the middle of the month and usually moves prices more. The PCE price index from the Bureau of Economic Analysis comes out later and is the measure against which the Fed sets its 2% inflation target.

Why does a currency rise with higher inflation?

Because higher inflation than expected makes higher rates or rates staying high for longer more likely. Higher rates make investments in that currency more attractive, which supports the price. This does not always apply: if inflation comes from an energy shock that slows growth, or if the market doubts the central bank, the currency can fall anyway.

What is core inflation?

Core inflation is the inflation rate without the particularly volatile prices. In the US, energy and food are excluded, in the euro area also alcohol and tobacco, and in Japan the usual core rate excludes only fresh food. Central banks pay attention to it because it shows persistent price pressure better than the headline rate.

When are US inflation data released?

Consumer prices (CPI) and producer prices (PPI) usually come out around the middle of the following month, the PCE price index towards the end of the following month, each at 8:30 a.m. New York time. That is 13:30 UTC in winter and 12:30 UTC in summer. The FinScans calendar shows the releases in UTC with consensus and previous value.

Sources

• U.S. Bureau of Labor Statistics: Consumer Price Index, monthly release and explanations.
• U.S. Bureau of Economic Analysis: Personal Income and Outlays, monthly release including the PCE price index.
• Eurostat: Harmonised Index of Consumer Prices (HICP), methodology and flash estimate.