This article explains the basics of US CPI, the difference between headline and core CPI, and how to interpret year-on-year and month-on-month changes, as well as the channels through which CPI affects dollar-yen.
US CPI is a leading economic indicator of price trends, and markets often react immediately after its release. CPI covers a broad range of items, including food, housing costs, clothing, transportation, medical care and recreation.
The difference between headline and core CPI is that headline CPI is the overall index, including food and energy, while core CPI excludes them. Core CPI tends to attract attention as an indicator less affected by weather and crude oil prices, but this does not mean that either is the “correct index.”
Year-on-year and month-on-month changes show the medium-term trend and recent momentum, respectively. Year-on-year changes are used to assess longer-term price trends, while month-on-month changes are used to check the recent pace of inflation.
CPI moves dollar-yen because price trends affect expectations for the Federal Reserve's monetary policy. If CPI exceeds market expectations, the likelihood of higher US yields may increase, potentially supporting a stronger dollar and higher dollar-yen. Conversely, if CPI falls short of expectations, the likelihood of lower US yields may increase, potentially weighing on the dollar and pushing dollar-yen lower.
When CPI is released, it is important to watch the gaps between forecasts for headline and core CPI, as well as component items such as housing costs, services, food and energy. The market assesses the data in combination with other factors.