CPI (Consumer Price Index)

CPI measures the average change over time in the prices consumers pay for a fixed basket of goods and services -- groceries, rent, fuel, healthcare, and similar. It's reported both year-over-year (YoY, vs. the same month last year) and month-over-month (MoM). Most central banks, including the Fed and ECB, target roughly 2% annual inflation as healthy; meaningfully above or below that is what moves markets.

Headline CPI includes food and energy, which swing sharply for reasons (weather, oil supply shocks) that have little to do with the underlying economy. Core CPI strips those out, and central banks generally weight core more heavily when deciding on interest rates -- it's the cleaner signal of whether policy is actually working.

Inflation running hot raises the odds a central bank holds rates higher for longer (or hikes again), which tends to strengthen that currency. Inflation running cool raises the odds of a rate cut, which tends to weaken it. The market reacts to the surprise vs. consensus forecast, not the number in isolation -- a 3.5% print that was expected to be 3.5% moves nothing.

Suppose the market expects US headline CPI at 3.1% YoY (matching last month) and core CPI at 3.4% YoY. The actual release comes in at 3.5% headline and 3.8% core -- both meaningfully hotter than forecast. Traders read this as raising the odds the Fed holds rates higher for longer, and USD would typically be expected to strengthen in the minutes after release, purely on the repricing of rate expectations.