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Consumer Price Index (CPI)

Lagging Indicator

The Consumer Price Index is what most people mean when they say "the inflation number." Every month, the government sends people out to track the prices of roughly 80,000 items — groceries, gas, rent, medical care, airline tickets, and more. CPI measures how much that basket of goods costs compared to a year ago. If CPI is running at 4%, prices are on average 4% higher than they were twelve months prior.

The chart shows two versions. Headline CPI includes everything — including food and energy, which can swing wildly based on oil prices or a bad harvest. Core CPI strips those volatile components out to show the underlying inflation trend that monetary policy can actually influence. When headline spikes but core stays calm, it usually means an external shock — like a surge in oil prices — is driving the number rather than broad demand-side inflation. When both are elevated and rising together, it signals more persistent pressure that the Fed will need to address by raising interest rates. Higher rates make borrowing more expensive across the whole economy — for how that flows through to Treasury yields, see the Yield Curve Analysis dashboard.

Personal Consumption Expenditures (PCE)

Lagging Indicator — The Fed's Preferred Measure

Here is something important to know: the Federal Reserve does not actually target CPI. It targets PCE — specifically Core PCE, which excludes food and energy. So when the Fed says its goal is 2% inflation, this is the number it is measuring against. That makes Core PCE the single most important inflation reading for understanding what the Fed will do next with interest rates.

Why does the Fed prefer PCE over CPI? Two reasons. First, PCE covers a broader range of spending — it includes things like healthcare costs paid by your employer that CPI misses. Second, PCE adjusts its weightings as people change their behavior. If beef prices spike and people switch to chicken, PCE captures that substitution. CPI does not — it keeps measuring beef at the same weight even after people have already stopped buying it. This makes PCE a more realistic picture of what inflation actually feels like for real households. PCE typically runs about 0.3 to 0.5 percentage points below CPI for this reason, so if you see a gap between the two, that is normal and expected — it is the methodology difference, not a contradiction.

When Core PCE is above 2.5%, the Fed is likely to hold rates higher for longer or even raise them further. When it falls sustainably below 2%, the Fed has room to cut. This is the dial the Fed watches most closely — and therefore the one that most directly drives the interest rate environment that affects your portfolio. For current rate levels, see the Yield Curve Analysis dashboard.

Producer Price Index (PPI)

Leading Indicator for Consumer Prices

If CPI and PCE tell you what consumers are paying today, PPI tells you what businesses are paying today — which gives you a preview of what consumers will likely pay in a few months. PPI measures price changes at the wholesale and manufacturing level: raw materials, factory inputs, freight costs, and the goods that businesses sell to each other before they ever reach a store shelf.

Here is the key insight: price changes at the producer level typically take two to three months to show up in consumer prices. When a manufacturer faces higher input costs, they do not immediately raise retail prices — they absorb it for a while, hoping it is temporary. But if costs stay elevated, they eventually pass them through. This lag makes PPI one of the most useful forward-looking signals in the inflation toolkit. A surge in PPI today is a warning that CPI may be heading higher in the coming months. A sharp drop in PPI — like we saw when supply chains normalized in 2023 — gives early confidence that consumer inflation is about to follow it lower.

The bar chart uses color to make direction clear: gold bars mean producer prices rose year-over-year, red bars mean they fell. Sustained red can signal deflationary pressure building in the supply chain — which sounds good for consumers but can be a warning sign of weakening demand across the economy. For the demand side of that equation, see the Employment Analysis dashboard, where wage growth and labor costs show you whether demand-side inflation pressure is building or fading.

Inflation Expectations (Breakeven Rates)

Market-Based Forward Indicator

CPI, PCE, and PPI all tell us about inflation that has already happened. Breakeven rates tell us what the bond market thinks inflation will be in the future. They are derived by comparing the yield on a regular Treasury bond to the yield on a TIPS bond — a Treasury bond that is specifically designed to protect against inflation. The gap between those two yields is the market's best collective guess at future inflation. If the 10-year breakeven is at 2.4%, it means bond investors are pricing in roughly 2.4% average annual inflation over the next decade.

The chart shows both the 5-year breakeven and the 10-year breakeven. The 5-year is more sensitive to near-term economic conditions and Fed policy — it can move quickly when oil prices spike or recession fears rise. The 10-year reflects longer-term structural views about whether inflation will stay under control over a full decade. When the 5-year runs significantly above the 10-year, markets are pricing in near-term inflation pressure but expect it to fade. When both are elevated and close together, it is a more serious signal that inflation expectations are becoming unanchored — meaning people no longer fully trust that inflation will return to 2%.

The dashed line marks the Fed's 2% target. Breakevens consistently above that line put pressure on the Fed to keep rates elevated. Breakevens below it give the Fed room to cut. This is why bond market expectations matter so much — they help set the conditions under which the Fed acts, which in turn affects every other asset class. To see the full decomposition of how breakevens relate to real yields and nominal Treasury yields, see the Yield Curve Analysis dashboard.

Putting It All Together

These four indicators tell a connected story about where prices are, where they are heading, and whether the Fed has the situation under control. CPI and PCE tell you what has already happened to prices. PPI tells you what is likely coming in the next two to three months. And breakeven rates tell you whether the bond market — the largest and most sophisticated market in the world — still trusts the Fed to keep inflation anchored at 2%. When all four are elevated and moving in the same direction, inflation is a serious and broad-based problem that will force the Fed's hand on interest rates. When they diverge — say, headline CPI is high but PPI is falling and breakevens are stable — it suggests the pressure may be temporary and self-correcting. Reading them together is always more informative than any single number alone. For how inflation expectations flow through to Treasury yields and the cost of government borrowing, see the Yield Curve Analysis dashboard.