Inflation reports: headline, core and base effects

Prerequisite: Reading a currency pair

On a small screen, scroll the figure sideways or open it full size.

Learning objective

Read the measurement period and component detail before interpreting inflation.

Inflation describes changes in a measured price basket, not every household’s exact spending experience. CPI and PCE have different coverage and methods. Headline measures include all designated components; core measures usually exclude food and energy to examine less volatile trends.

Monthly and yearly rates answer different questions. Yearly inflation can fall because the comparison month last year was unusually high, even when the current month rises. Check whether data are seasonally adjusted and avoid mixing adjusted monthly rates with unadjusted index levels.

Market interpretation depends on the surprise, breadth and likely policy response. Higher inflation may raise nominal yields, weaken purchasing power or alter growth expectations. These channels can pull currencies and gold in different directions; one headline does not determine an automatic trade.

Common mistakes

Falling inflation is not necessarily falling prices. A smaller positive rate means prices still rise, more slowly.

Practice

Compare two official releases: record monthly and annual figures, core and headline, adjustment method and two major contributing components.

Sources & further reading

• BLS — Consumer Price Index