The Consumer Price Index (CPI) measures the average change in prices paid by households for a fixed basket of goods and services. It is published monthly by a national statistics office and is the standard gauge of consumer inflation: the annual inflation rate is the percentage change in the index against the same month a year earlier.
How the index is calculated
Three inputs define a CPI: a basket, a set of weights and a base period.
The basket is a list of goods and services that households actually buy, from rent and electricity to bread and haircuts. Each item is given a weight equal to its share of total household spending, taken from expenditure surveys and updated periodically. The base period is set to 100, and every later reading is expressed against it.
The index change for a month is the sum of each group's price change multiplied by its weight. A simplified three-group example makes the arithmetic visible:
| Group | Weight | Price change |
|---|---|---|
| Housing and utilities | 0.50 | +4.0% |
| Food | 0.30 | +2.0% |
| Transport | 0.20 | −1.0% |
Weighted change = (0.50 × 4.0) + (0.30 × 2.0) + (0.20 × −1.0) = 2.0 + 0.6 − 0.2 = 2.4%. An index sitting at 100.0 would move to 102.4. Note that one group fell and the index still rose: the weights, not the number of items going up, drive the result.
Headline vs core. Headline CPI covers the whole basket. Core CPI strips out the most volatile components — food and energy in the US series, energy and unprocessed food in the euro area's harmonised index (HICP). The exclusion list is defined by the statistics office and is not identical across countries, so two "core" figures are not directly comparable.
Primary sources: the US Bureau of Labor Statistics for US CPI and Eurostat for euro area HICP, including the flash estimate and the final reading.
CPI, PPI and inflation expectations
- CPI measures prices at the point of household purchase.
- PPI (producer price index) measures prices received by producers at the factory gate. It sits earlier in the chain and does not pass through to CPI in any fixed proportion or on any fixed timetable.
- Inflation expectations are not measured prices at all. They come from consumer and forecaster surveys and from market instruments such as index-linked bonds and inflation swaps. They describe what inflation is expected to be, which can differ from what it has been.
Why a CPI release moves quotes
CPI does not act on an exchange rate directly. It acts on what the market believes a central bank will do next. A reading that changes the expected path of policy rates changes the interest rate differential priced into a currency pair, and quotes reprice with it.
Because expectations are formed before the release, the number that matters is the gap between the print and the consensus, not the level itself. A high inflation reading that is exactly what was expected can pass with little movement, and the reaction can also run the other way once traders read the detail behind the headline. No release implies a direction.
Where to check the date: CPI release dates and times are listed in the ABF Trade economic calendar.
