How to Trade Consumer Price Index.

Make Your First CPI Squawk Count

Published Mon, 25 April 2022 9:45:00 GMT

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.

REMEMBER: This is not trading advice. This is educational material written from an academic perspective and the markets respond to a myriad of factors each time. The market can react differently.

Start a Trial Now

Hundreds of traders already use Newsquawk to mitigate the risk of being caught out on market impacting news. When will you?

100% Free for 14 days

Cancel any time

Be ready for your next economic event

Most professional traders see results during free trial

Start Your Trial

What Professional Traders Say...

Sam North
eToro

" With Newsquawk you get the services of a full analyst team for the price of their coffee each month. It’s a no-brainer value wise compared to hiring your own analysts."

Mark Dimelow
Derivatives Trader

"A month of Newsquawk pays for itself in less than one good position. The speed benefit you get from a squawk news service when you trade news events is huge. It just makes everything easier to understand and react to."

Adrian Spain
AJG Futures

"Having access to Newsquawk whilst trading from home makes me feel I’m back on the trading floor, with the audio of the moving news and additional full analysis of the economic and geopolitical events. The cost of the service is easily covered 10 fold with timely trades on breaking news which is not priced into markets."

Mike Donahue
Machina Trading

"I use news from Newsquawk to nudge clients into making a trade. They provide news about bonds, commodities and FX that I don’t get from competitors."

Eldon Kerr
Starmark

"I really enjoy the follow ups around global macro events as it helps provide more understanding on market moves. It’s really helpful for reading the equity markets."

Jarratt Davis
Financial Source

"Newsquawk’s ability to process and filter news headlines at the speed they do directly benefits our traders financially. The cost of the service is nothing compared to the benefit."