Module 10 · Lesson 6 of 12 · Fundamentals and macro · About 5 minutes
Inflation Reports: CPI, PCE and PPI Explained
On this page
- What you will learn
- What is inflation, as a number?
- Inflation measures diagram
- What does CPI measure?
- What is core inflation?
- How is PCE different?
- What does PPI measure?
- Why do markets react to inflation reports?
- What this does not tell you about inflation reports
- Method in Practice
- Check yourself
- Reflect on your own process
- Sources
Before you read: Central Banks and Interest Rates: How Policy Reaches Markets
What you will learn
- What the Consumer Price Index, the PCE price index and the Producer Price Index measure.
- The difference between headline and core inflation, and between month-over-month and year-over-year.
- Who publishes each report and why markets watch them.
What is inflation, as a number?
If prices rose 3% over a year, which prices are we talking about?
Inflation is the rate at which a general level of prices rises. Statistical agencies measure it by pricing a defined basket of goods and services over time. The answer depends on the basket, the weights and the method, which is why there is more than one inflation measure.
Inflation measures diagram
Illustrative diagram constructed for teaching. Not real market data.
The diagram compares fictional CPI and PCE baskets, with shelter taking a larger share of CPI, and shows how a 0.3% monthly change compounds to about 3.7% over a year. It is constructed for teaching and is not real market data.
What does CPI measure?
What does a typical urban household spend its money on?
The Consumer Price Index is published monthly by the US Bureau of Labor Statistics (BLS). It tracks prices paid by urban consumers for a basket that includes food, energy, housing, transport, medical care and other items. Shelter, which includes rent and an estimate of what owners would pay to rent their homes, is the largest single part.
Two ways of quoting it matter:
- Month over month (m/m): the change from the previous month, seasonally adjusted. A 0.3% monthly rise is roughly 3.7% if it continued for a year, because of compounding.
- Year over year (y/y): the change from the same month a year earlier.
What is core inflation?
Why might a measure that leaves out food and gasoline be useful?
Core inflation removes food and energy, whose prices swing a great deal from month to month. Core is not a better measure of the cost of living; people still pay for food and fuel. It is used to see the underlying trend more clearly. Other trimmed or “supercore” measures exclude more items, and their definitions vary by source.
How is PCE different?
If people switch from beef to chicken when beef gets expensive, should an inflation measure notice?
The Personal Consumption Expenditures (PCE) price index is published monthly by the Bureau of Economic Analysis (BEA). It covers a broader range of spending than CPI, including spending made on behalf of households, such as employer-paid health insurance. It uses a formula that adjusts for people switching between goods as relative prices change, and it gives housing a smaller weight than CPI. PCE inflation has often run somewhat below CPI inflation. The Federal Reserve states its 2% inflation goal in terms of PCE.
What does PPI measure?
What happens to prices before goods reach the store?
The Producer Price Index, also from the BLS, measures prices received by domestic producers for their output, including goods, services and construction. It is often watched as an early look at cost pressures that may pass through to consumer prices later, although the link is loose.
Why do markets react to inflation reports?
If inflation comes in higher than expected, what might change in a central bank’s view?
Inflation data feeds expectations about central bank policy. A reading above the consensus estimate can push yields up if markets expect tighter policy, and a lower reading can do the opposite. Reactions can be fast and large, and they can reverse. Release times are published in advance; CPI, PPI and PCE usually come out at 8:30 a.m. Eastern Time, and the economic calendar lists them.
What this does not tell you about inflation reports
- What any report will show or how markets will react.
- Exact basket weights, which the agencies update and publish.
- Your own inflation rate, which depends on what you buy.
- Nothing here suggests trading on any release.
Method in Practice: one release-day approach
Fictional example. John, Harbor Index futures, the prices, times, costs and results are all invented for teaching. This shows how a written plan can be built and tested. It is not a recommendation, and nothing here says how often this idea works.
Try it on a real chart. Test this idea yourself on past sessions with bar replay. Keep your own count, including the days with no trade.
The idea. CPI, the jobs report and GDP are different releases, but John treats them with one written approach, graded by how much each one has moved his market (this lesson, The Jobs Report: Payrolls, Unemployment and Wages, GDP, PMI and Retail Sales: Measuring Economic Growth and Economic Events and Headlines: Volatility, Not Instructions).
John's release table
| Release | His grade | Rule |
|---|---|---|
| Inflation (CPI) | Major | Stand aside from an hour before the release until one full 30-minute period after it. If it comes before the open, until one full period after the open |
| Jobs report | Major, before the open | Wait one hour after the open, then the normal plan |
| GDP, PMI, retail sales | Medium | Normal plan at 1 contract |
Three outcomes
-
Jobs day: waited an hour, then a normal trade → +$85
-
GDP day (medium): 1 contract, failed → −$50
-
CPI day: stood aside, and price jumped 0.90 point in seconds after the release → $0
Show the full replays
| Replay | What happened | Result after costs |
|---|---|---|
| Jobs day | Report 07:30. Waited until 09:30. Bought 2 at 100.65, sold at 101.05 and 101.20 | +$40 + $55 − $10 = +$85 |
| GDP day | Line at 100.70. 1 contract at 100.80. 30-minute close below 100.70, out at 100.35 | −$45 − $5 = −$50 |
| CPI day | Release 07:30, before the open. Price jumped 0.90 point within seconds. Under John's table the plan isn't active until one full period after the open (09:00). No setup came by noon | $0 |
Test it yourself
- Grade each release for your market from your own replays, not from headlines.
- Use the agency's own schedule for release times (Reading Primary Sources: Filings, Releases and Exchange Notices).
- Replay a year of release days under your table.
Where it breaks
- Revisions to earlier numbers can matter as much as the new number.
- The market reacts to the number against expectations, which aren't on the agency's page.
- A release's grade can change over time.
Reflection question: Which releases are on your calendar, and does each one have a rule?
Check yourself
- Which agency publishes CPI, and which publishes PCE? Hint: one counts labor, one analyzes the economy.
- What does core inflation leave out, and why? Hint: the two most volatile categories.
- Why can PCE inflation run below CPI inflation? Hint: housing weight and switching between goods.
Reflect on your own process
- When you record an inflation figure in your notes, do you write down whether it is monthly or yearly, headline or core, and its source?
- What does your written plan say about release times like 8:30 a.m. Eastern, and where did you confirm the schedule?
- How would you check a headline's inflation number against the agency's own release and its revisions?
- Which releases are on your calendar, and does each one have a rule?
Sources
- Consumer Price Index: Frequently Asked Questions
- Relative importance of components in the Consumer Price Indexes, December 2025
- Differences between the Consumer Price Index and the Personal Consumption Expenditures Price Index
- What accounts for the differences in the PCE price index and the Consumer Price Index?
- Personal Consumption Expenditures Price Index
- Producer Price Indexes: Overview
- Release Calendar
- Statement on Longer-Run Goals and Monetary Policy Strategy