How to Trade Consumer Price Index.

WHAT IS IT?

The monthly Consumer Price Index is released by the Bureau of Labor Statistics. The headline is a measure of how prices on a basket of consumer goods and services have changed over the course of the month and year. Traders also focus on the “core” measures of CPI, which strips out volatile food and energy prices, giving us a smoother look at the trend rates of inflation. The data also includes a measure of real weekly earnings, giving us an idea of how consumers' real wages have changed in the month.

THE ANNOUNCEMENT

The data will be published to the Newsquawk news feed as well as announced over the audio squawk. We squawk the data in 3 parts:

1. 1. Headline measures: includes the CPI change over the month and year
2. 2. Core measures: excludes food and energy inflation
3. 3. Real weekly earnings data

EXPECTATIONS

Traders use a wide range of gauges as a guide on what to expect to see in the official release. Market-based expectations, like inflation swaps and forwards, can give an idea about how traders price inflation changes ahead. Many business surveys also contain “prices paid” metrics, a diffusion index asking how the situation has changed relative to the prior month. Consumer-focused surveys - like the Conference Board and University of Michigan's monthly gauges, or even the NY Fed's monthly survey - reveal how consumers' future expectations of inflation have changed in the month.

A POSITIVE ANNOUNCEMENT

From an academic perspective, if consumer prices rose at a rate higher than the consensus was expecting, you could see the following impacts:

• Equities: Growth-sensitive stocks come under pressure, because often growth stocks are a bet on future income, and higher inflation will erode the future value of an income stream.
• Fixed Income: Bonds may come under pressure, since higher inflation reduces the present value of future earnings
• Forex: US Dollar would be expected to rise as traders discount the prospect of higher future rates and tighter policy. Higher inflation could lead to tighter monetary policy, where the Fed would reduce accommodation to manage price pressures
• Energy: Perhaps higher on an inflationary angle alone
• Metals: Precious metals firmer, at least if the inflation number is quite a bit stronger than expected

A NEGATIVE ANNOUNCEMENT

If inflation data was below expectations you could see the following impacts:

• Equities: Duration sensitive stocks benefit, as it may suggest that monetary policy will continue to be accommodative
• Fixed Income: Likely supports bonds as lower inflation helps the value of future earnings
• Forex: US Dollar expected to fall as traders consider the prospect of lower future rates and looser policy
• Energy: Possibly lower if numbers imply deflationary angle
• Metals: Precious metals slightly weaker

BIGGER PICTURE

In the current environment the Federal Reserve seems more focused on the inflation part of its mandate, and is even prepared to tighten policy into restrictive territory (what economists describe as lifting rates above the so-called "neutral level"). Accordingly, higher-than-expected inflation would likely result in bets that the Fed would tighten policy sooner and more aggressively than it has previously indicated that it would.