Lesson 3 of 9 · 7 min
Inflation and CPI
Why a monthly price index moves the currency market more than almost anything else, and how to read a release.
By the end you'll be able to
- Explain what CPI measures and why central banks watch it
- Trace the chain from an inflation surprise to a currency move
- Tell the difference between headline and core inflation
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A number about the price of groceries and rent, published once a month, can move EUR/USD a hundred pips in a minute. It moves the currency because it changes what the central bank is expected to do.
What CPI is
Inflation is the rate at which prices rise. The consumer price index measures it by tracking a basket of everyday goods and services and reporting the change, usually as a year-on-year percentage.
Most central banks target inflation of about 2%. Above that, they lean towards raising rates to cool the economy. Below it, they lean towards cutting. CPI is therefore the clearest early signal of what the bank will do next.
Two versions are published: headline CPI includes everything; core CPI strips out food and energy, which swing with weather and oil. Central banks focus on core because it shows the underlying trend. Markets watch both.
The chain
Inflation does not move the currency directly. It changes what the market expects the central bank to do, and that moves the currency.
An above-forecast CPI print makes rate rises (or fewer cuts) more likely, and the currency usually strengthens on the release. Below-forecast does the reverse. The size of the move depends on how big the surprise is and how finely balanced the next rate decision was.
Try it
| Time | Cur. | Impact | Event | Previous | Forecast | Actual |
|---|---|---|---|---|---|---|
| 13:30 | USD | ●●● | CPI (inflation, year on year) | 3.2% | 3.1% | — |
Slide the actual figure. The market reacts to the gap between actual and forecast, not to the number itself. Reactions are illustrative.
Notice how the reaction is roughly proportional to the surprise, and how an in-line number produces almost nothing, however high or low it is in absolute terms.
Quick check
Question 1 of 3
Why does a high CPI print usually strengthen the currency?
Question 2 of 3
Core CPI differs from headline CPI by:
Question 3 of 3
CPI falls from 3.4% to 3.1%. The forecast was 2.9%. The likely immediate reaction:
Go deeper: What is CPI? How inflation data moves forex