What inflation (CPI) numbers mean for your money
The Consumer Price Index measures how fast everyday prices are rising. Here is how it works, what "core" means, and why markets react to it.
Inflation means prices are rising across the economy. The most quoted measure of it in the US is the Consumer Price Index, or CPI. When a new CPI number comes out, stock and bond markets often move within minutes.
What CPI is
CPI tracks the price of a basket of goods and services that households buy. The basket includes food, rent, gasoline, clothing, medical care, cars and much more.
It is published every month by the Bureau of Labor Statistics, a US government agency. Staff collect prices across the country and combine them into one index.
How to read the number
The headline figure is usually the change over the past 12 months. If CPI is up 3% from a year ago, the basket costs 3% more than it did then.
There is also a month-to-month figure. It is smaller, but it shows the latest direction more quickly.
Headline and core
- Headline CPI includes everything in the basket.
- Core CPI leaves out food and energy.
Food and energy prices jump around a lot, often for reasons like weather or world events. Core CPI strips them out to show the underlying trend. Economists and the Federal Reserve pay close attention to it.
What it means for your money
Inflation reduces what your money can buy. Here is an example with round numbers. If prices rise 3% in a year, $100 in a drawer buys only about $97 worth of goods a year later.
That is why savings that earn less than inflation lose value in real terms, even though the dollar amount stays the same.
Why markets react
The Federal Reserve aims to keep inflation at about 2% over time. Its main tool is interest rates.
A higher-than-expected CPI reading can lead investors to expect higher rates for longer. That often pushes stocks down and bond yields up. A lower reading can do the reverse. See How interest rates move stock prices.
As with most data, what matters most is the surprise. Markets compare the number with what economists forecast beforehand.
The Canadian side
Canada has its own CPI, published monthly by Statistics Canada. The Bank of Canada also aims to keep inflation at about 2%.
The short version
- CPI measures the change in prices of a basket of everyday goods and services.
- It is published monthly by the Bureau of Labor Statistics.
- Core CPI leaves out food and energy to show the underlying trend.
- Markets react to how the number compares with forecasts.
This is general information, not investment advice.
Updated