1.5 US Inflation Explained: CPI, PPI & PCE for Traders

The inflation releases traders follow, how to compare a print with what was expected, and how it reaches a stock position.

  • 1.5
  • 12:59
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About this lecture

How does an inflation report reach your stock position? Through changing interest-rate expectations and the prices that shape a company's revenue and costs.

In this lecture, Pratham breaks down US inflation, the releases traders follow, and how to compare a new number with what the market expected.

You'll learn about:

  1. Demand, supply and expectations as sources of inflation
  2. Purchasing power, borrowing costs and company earnings
  3. Month-over-month versus year-over-year readings and the base effect
  4. CPI, PPI and PCE—and why their roles differ
  5. Headline, core and services inflation
  6. Consensus forecasts, the Cleveland Fed nowcast, breakevens and household expectations
  7. Reading the 2-year Treasury yield and index futures around a release
  8. Why the composition of a surprise and the trend across several reports matter

Watch lecture 1.4 on the Fed first to follow the connection between inflation, the expected rate path and stock valuations.

Educational content only. Not investment advice.

MochaLearn is a free A to Z course on understanding and trading US stocks and commodities, built for Indian traders.

Key takeaways

  1. Inflation reaches a stock two ways: through interest-rate expectations, and through the prices that shape a company's revenue and costs.
  2. CPI, PPI and PCE measure different things; headline, core and services readings answer different questions; and the base effect can move a year-over-year number without prices changing much this month.
  3. What matters is the print against the consensus — and the composition of the surprise and the trend across several reports, not one number.
  4. Watch the 2-year Treasury yield and index futures in the minutes after a release to see how the market read it.

Terms in this lecture

  • Average hourly earningsAverage hourly earnings is the wage growth number in the US jobs report. Wages are the bridge from jobs to prices…
  • Breakeven inflationBreakeven inflation is the gap between an ordinary Treasury yield and its inflation-protected twin of the same…
  • Consensus estimateThe consensus estimate is the average analyst forecast for a company's earnings or an economic number. Markets price…
  • Core CPICore CPI is CPI with food and energy removed, the volatile parts that interest rates cannot fix. The market often…
  • CPICPI, the consumer price index, is the monthly US measure of what a basket of goods and services costs households…
  • Crude oil (WTI vs Brent)Crude oil trades as two benchmarks: WTI at the Cushing pipeline hub on NYMEX, and Brent at sea on ICE, which prices…
  • Dual mandateThe dual mandate is the Fed's job as Congress wrote it: stable prices and maximum employment. The 2% inflation target…
  • FREDFRED is the free St Louis Fed database of every major US economic series going back decades, charts and downloads with…
  • GICS sectorsGICS sectors are the eleven sectors S&P and MSCI use to classify every company: energy, materials, industrials…
  • Gross marginGross margin is revenue minus the direct cost of making the product, as a percent of revenue. It shows pricing power…
  • Index futures (E-mini S&P 500)Index futures are futures on a stock index, like the E-mini S&P 500 on the CME. They trade almost round the clock, so…
  • JOLTSJOLTS is the BLS survey of job openings and labour turnover. Openings against unemployed workers is the Fed's read on…
  • OPEC+OPEC+ is OPEC's members plus Russia and other producers, agreeing output quotas: the one cartel that moves a global…
  • PCEPCE, the personal consumption expenditures price index, is the inflation measure the Fed targets at 2%, published by…
  • PPIPPI, the producer price index, measures the prices businesses receive, which makes it inflation upstream of the shop…
  • Sector ETFA sector ETF holds one of the eleven GICS sectors, like XLE for energy, XLF for financials or XLK for technology. A…
  • TariffA tariff is a tax on imports. In the US the president can set many of them alone, effective the moment they are…

Quiz

  1. An inflation print lands exactly on the consensus forecast. What does the lecture suggest?
  2. What is the base effect?
  3. Which market signals does the lecture read around a release?