Above the 2% target pushes the central bank to tighten.
The short answer
- What is the annual inflation indicator (Inflation)?
- Annual inflation: the year-over-year change in the general price level.
- When is Inflation wrong?
- The average hides sharp differences between categories. See it on live market data in the 'Rates and yields page'. Open the rates and yields page →
Indicator limit
The average hides sharp differences between categories.
Read it with
Retail sales: high inflation lifts nominal sales without any real growth.
Answers: how is the economy doing?
What it measures
Inflation is the rate at which a currency loses purchasing power: the general price level rising over time. It is measured by several indexes, the best known being the Consumer Price Index and the Personal Consumption Expenditures index. The latter is the one the Federal Reserve prefers and builds its 2% target on.
Why two measures, not one
Because they weight the basket in two ways. The first holds the basket fixed and measures its cost. The second adjusts for consumer behavior, as shoppers swap expensive items for cheaper ones. That is why the expenditures index usually comes in lower, and the gap between them is not an error but a different definition. Mixing them up produces pointless arguments.
Expectations matter more than the number
What a central bank fears most is not today's inflation but expectations becoming entrenched. Once people and companies start acting as if it will last (wage demands, pre-emptive pricing), inflation becomes self-fulfilling and is hard to break without a heavy economic cost. That is why expectations are measured with surveys and with inflation-protected bond markets.
Effect on portfolios
It hurts fixed-coupon bonds directly (their nominal coupon buys less), hurts growth stocks through the discount rate, and helps assets like commodities and companies with pricing power that pass costs on to customers. So inflation reshuffles sectors, rather than simply lifting or lowering the market.
Hypothetical example
A headline reading falls thanks to energy while the core reading stays stuck: the headline is reassuring and the substance is not. The market cheers for an hour, then reprices when the Fed points to the core reading, which was available from the first minute.
Read it with
Read it with interest rates and their expected path, with wages in the jobs report, and with real yields (nominal minus expected inflation), which are the real driver of gold and long-duration assets.
Where to see it on the platform
The macro dashboard shows inflation readings and their paths, and the calendar schedules their release dates.
