CPI: the headline and the two cores
The consumer price index measures what a basket of goods and services costs. Three versions matter:
- Headline (all items) — includes food and energy. This is what households experience and what the news reports.
- Core (ex food and energy) — strips the volatile components. Central banks watch this because it tracks persistent inflation.
- Supercore — core services excluding housing. Labour-intensive and sticky; it has become the focal point for policy.
Why strip food and energy
Not because they do not matter to households — they matter enormously — but because they are driven by supply shocks that mean-revert. A hurricane that spikes petrol prices pushes headline inflation up for a month and back down the next. If policy reacted to that, it would be chasing noise. Core is a cleaner read on where inflation is going.
Level versus momentum
Year-over-year CPI is the most quoted number and the least useful for turning points, because it averages the last twelve months — by the time it falls, the change already happened. Traders watch:
- Month-over-month — the freshest read, but noisy.
- Three-month annualised — the standard momentum measure: compound the last three monthly changes to an annual rate.
- Six-month annualised — smoother, slower.
PPI and the pipeline
The producer price index measures what businesses pay. It often leads CPI because cost pressures pass through with a lag. It is noisier and revised more, so treat it as corroboration rather than signal.
The honest caveat
CPI is a lagging, imperfectly measured statistic. Owner's-equivalent rent — a large component — is an imputation, not a transaction. Housing components feed through with a lag of a year or more. Do not treat one print as revelation.
How to check this yourself
Take one monthly CPI index and compute three things from it: the year-over-year change, the three-month annualised change, and the six-month annualised change. You will get three different stories from the same series. Decide which one you are trading and say it out loud — most arguments about inflation are two people quietly quoting different windows.