Part 2 · Prices: the value of money · Lesson 8
How to read CPI: headline and core
The number in an inflation story is not just one. Learn to read, in order, the year-on-year and month-on-month rates, headline and core, and even the forecast.
QToday's question
The news says 'the inflation rate has slowed,' so why are prices at the store still just as expensive?
On CPI release days the stock market swings widely, and the numbers in the articles, like 9.1%, 0.0%, and 5.9%, come in several versions, which is confusing. In this lesson we start from how the CPI number is made and build up step by step to the order in which to read it on release day.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
We carry over directly the idea from Lesson 7, Inflation, that 'when prices rise, money's purchasing power shrinks.' We also use Lesson 1's 'when interest rates rise, the multiple shrinks' again in STEP 3.
- STEP 1 · Basic conceptsCPI is a price tag on a shopping basket
You will understand that turns the price of a shopping basket into an index, and be able to calculate the inflation rate directly from the index.
- STEP 2 · Understanding the principleYear-on-year and month-on-month, headline and core
You can explain why the same month comes with several numbers, and tell apart the and .
- STEP 3 · Real-world applicationReading CPI on release day
You can read the CPI trends in the US and Korea and compare them with the forecast to guess the reaction of interest rates and the stock market.
STEP 1CPI is a price tag on a shopping basket
In Lesson 7 we said that when prices rise, the same money buys less. So how do we measure 'prices' with a single number? Let's start there.
How prices are measured: fix a basket and re-price it
The price of a single item can rise or fall. So inflation is measured not with one item but with the price of a 'basket' that gathers the goods and services a typical household buys. It includes food such as rice and vegetables, energy such as gasoline and electricity bills, rent, clothing, transportation, medical bills, dining out, and telecommunications. The weight of each item in the basket is set to match the share households actually spend on it. The more an item is spent on, the bigger its effect on inflation.
The sets the value of this basket at 100 at a base point in time and expresses, as an index, how much it costs to buy the same basket again each month. In the US the Bureau of Labor Statistics (BLS) of the Department of Labor publishes it around the middle of each month, and in Korea Statistics Korea publishes it at the start of each month.
An easy analogy · our household's shopping basket
Let's cut what our household buys in a month down to just three things. This basket cost KRW 100,000 last year, and buying exactly the same things this year cost KRW 104,000. Then our household's prices rose 4%.
| Last year | This year | Change | |
|---|---|---|---|
| Basket cost | KRW 100,000 | KRW 104,000 | +4% |
| As an index | 100 | 104 | Inflation rate 4% |
Even though gasoline actually fell, overall prices rose. The inflation rate does not mean 'everything rose 4%' but that 'the basket as a whole became 4% more expensive on average.' So if the things you buy often rose more, the prices you feel will seem higher than the announced figure.
This is a hypothetical example to aid understanding. The actual CPI basket contains hundreds of items.
Even when the inflation rate falls, prices do not come down
Here comes the first answer to today's question. Saying the inflation rate fell from 9% to 3% does not mean prices fell; it means the speed at which prices rise has slowed. In index terms, they are still going up, like 100 → 109 → 112. Prices that have already risen mostly stay where they are, so even if the rate falls, the basket is far more expensive than a few years ago. A fall in prices themselves is called deflation, which you'll learn about separately in Lesson 10.
Common misconceptions
- 'The inflation rate fell, so prices fell?'
- No. A lower inflation rate means prices are 'rising less.' The average price actually falls only when the rate drops below 0%.
- 'CPI is the same as the prices I feel?'
- No. CPI is based on the basket of an average household. The prices you feel differ by person depending on whether you pay rent, drive a car, or dine out often.
Quick checkThe CPI index was 120 at this time last year and is 126 now. What is the year-on-year inflation rate?
STEP 2Year-on-year and month-on-month, headline and core
In STEP 1 we said the inflation rate changes depending on the 'comparison point.' Now let's sort out in two branches why the CPI for the same month comes out as several numbers.
CPI numbers split by 'compared with when' and 'what was included'
By comparison point they split into and , and by the items included into headline and . If you tell apart these 2 × 2, four numbers, you can read almost any CPI article.
First branch: year-on-year and month-on-month
Year-on-year (versus the same month a year earlier) is the rate of increase compared with the index of the same month a year ago. Seasonal effects are wiped out automatically and it shows the change accumulated over a year, so the 'inflation rate' in a news headline is mostly the year-on-year rate. Month-on-month is the rate compared with just the previous month and shows the speed of prices right now. The US month-on-month figure is published as a seasonally adjusted value that filters out holiday and seasonal ups and downs.
It is handy to remember how the two relate. The year-on-year rate is the result of the last 12 months of month-on-month rates stacked up. If prices rise 0.25% every month, the year-on-year rate after a year is about 3%. Put the other way, even if the month-on-month rate suddenly jumps, the year-on-year rate follows slowly, and even if the month-on-month rate goes to zero, the year-on-year rate stays high for a while.
See it in a chart: the same month, two different numbers
Alternate between the actual month-on-month and year-on-year rates of US CPI, and tap a bar to check each month's number. Be sure to tap July 2022.
US CPI, January 2021 – December 2023
Tap a bar.
Source: US Bureau of Labor Statistics (BLS), FRED CPIAUCSL (seasonally adjusted, month-on-month) and CPIAUCNS (original series, year-on-year). Retrieved 2026-10-05.
In July 2022, US CPI's month-on-month rate was 0.0%. Prices essentially did not rise at all during that month. Yet the year-on-year rate for the same month was 8.5%. This is because the prices that had already risen sharply over the preceding 11 months remained. Just remember that month-on-month is 'the speed right now' and year-on-year is 'the result accumulated over a year.'
Base effect: the number from a year ago changes today's number
The year-on-year rate compares with the same month a year earlier, so today's number varies widely depending on what happened a year ago. If prices rose a lot around this time last year (a high base), this year's year-on-year rate comes out low, and if prices were held down a year ago (a low base), this year's year-on-year rate comes out high. This is called the .
So when you see an article saying the year-on-year rate has fallen, you should also ask, 'Has inflation really cooled, or was the number a year ago just too high?' Looking at the month-on-month rates of the last few months gives the answer. If the month-on-month rate keeps coming in low, it is a real slowdown, and if the month-on-month rate is still high and only the year-on-year rate went down, a base effect is likely.
Second branch: headline and core
Headline CPI is the inflation of the entire basket. But food and energy prices swing widely on temporary shocks such as weather, war, and decisions by oil-producing countries. Core inflation was created to filter out this noise and see the underlying trend of prices. The US publishes CPI excluding food and energy, and Statistics Korea mostly publishes an index excluding agricultural products and petroleum products as its core inflation.
| US CPI YoY | Headline | Core | How to read it |
|---|---|---|---|
| June 2022 | 9.1% | 5.9% | Energy and food rose sharply, so headline was much higher than core. |
| June 2023 | 3.0% | 4.8% | Energy prices fell, so headline dropped quickly, but core was still high. |
Source: US Bureau of Labor Statistics (BLS), FRED CPIAUCNS and CPILFENS original series, year-on-year. The June 2022 figures match the BLS release of Jul 13, 2022.
The time headline falls below core, as in June 2023, matters. On the surface it looks as if inflation has been tamed, but it is a signal that prices that tend not to come down once they rise, such as services and rent, are still running hot. This is why central banks say 'we are watching core inflation.' That does not make headline less important. Headline is what households actually pay, and if energy prices keep rising for long, it eventually spreads into core inflation too.
Quick checkThis month's US CPI year-on-year fell from 4% to 3%. But the month-on-month rate for the last three months has been 0.4% each month. Can we say inflation has definitely cooled?
STEP 3Reading CPI on release day
Now you can tell apart the four numbers. Let's look at the actual 10-year trend and practice in what order to read on release day.
Ten years of inflation in the US and Korea
Switch countries with the buttons, and tap the chart or sweep a finger across it to see that month's numbers. The dotted line is 2%, the target of both countries' central banks.
CPI year-on-year: headline and core
Tap the graph.
Sources: US BLS (FRED CPIAUCNS and CPILFENS, Jan 2016 – Aug 2026); Bank of Korea ECOS consumer price index 901Y009 all items and 901Y010 excluding agricultural products and petroleum products (Jan 2016 – Sep 2026), with year-on-year rates calculated directly from the index. US CPI for October 2025 has no value in FRED and is left blank. Retrieved 2026-10-05.
In both countries prices surged from 2021, with US headline peaking at 9.1% in June 2022 and Korean headline at 6.3% in July 2022. What is worth noting is that core inflation peaked later than headline. US core was highest at 6.6% in September 2022 and Korean core at 4.8% in November 2022. This is because energy prices rose first, and that burden spread over time to services and other goods prices. The latest figures are US August 2026 headline 3.4% and core 2.4%, and Korea September 2026 headline 2.9% and core 2.7%.
More important than the number: the gap from expectations
Before CPI is released, economists forecast this month's number in advance. The average of these forecasts is called the . The market prices in the forecast in advance, so what moves stocks and interest rates on release day is not the number itself but 'how different it was from expectations.'
The June 2022 US CPI is a good example. The market expected about 8.8%, but the actual figure was 9.1%. The month-over-month change was also very high at 1.3%, and core inflation was 5.9%. Hotter-than-expected inflation was taken as a signal that the Fed could raise rates faster. Conversely, even when inflation is high, the market can feel relieved if it comes in lower than expected. This 'gap versus expectations' is covered in more depth in Lesson 20.
How to read CPI on release day
- Compare the headline year-over-year figure with the forecast. Even a 0.1–0.2 percentage point gap is big news for the market.
- Look at core YoY and MoM. Central banks care more about this number, so on many days core decides the market reaction.
- Use the MoM trend to filter out the base effect. Check whether the MoM readings over the last three months are getting lower.
- Look at what pushed it up. The interpretation differs depending on whether it is a temporary item like energy or a sticky item like rent and services.
For stocks, it goes like this
In Lesson 1 you learned that stock price = earnings × multiple. CPI mainly shakes the multiple knob. When inflation runs hotter than expected, the odds of a central bank rate hike (or a delayed cut) rise, market interest rates and the dollar go up, and the higher discount rate shrinks the multiple. Growth stocks, which depend on earnings far in the future, tend to be shaken especially hard. Conversely, a cooler-than-expected CPI eases the interest-rate burden and works toward expanding the multiple.
| Release result | What moves first | Typical reaction |
|---|---|---|
| CPI higher than expected | Multiple | Interest rates and the dollar rise, and growth stocks weaken. Sectors that benefit from higher rates, such as banks, tend to hold up relatively well. |
| CPI lower than expected | Multiple | Expectations of falling rates tend to emerge, with strength in growth stocks and long-term bonds. |
| Headline high but core stable | Earnings | Energy prices have a big impact. It helps the earnings of refiners and energy companies, and weighs on the earnings of companies that buy fuel. |
You can find CPI release dates in the Earnings & Economic Indicators calendar, and which sectors benefit from current inflation in the 'Inflation rising' row of the Macro Map.
It does not always move that way. If the market had already braced for a high number, or if there is other big news on the same day, the reaction can differ from what you expect. Please read CPI as a 'clue for gauging direction.'
Quick checkUS CPI came in at 3.2%. The market expected 3.4%. Inflation is well above the 2% target, so how are growth stocks likely to react that day?
✓What we learned today
- CPI turns the price of a household's basket of goods and services into an index with the base period = 100. The inflation rate is the rate of change of that index.
- YoY compares with the same month a year ago, and MoM compares with last month. YoY is mixed with the effect of the year-ago figure, that is, the base effect.
- Headline is overall inflation, and core is inflation excluding volatile food and energy (in Korea, agricultural and oil products). Central banks use core to read the 'body temperature' of prices.
- The market reacts to the gap versus the forecast (consensus) rather than to the number itself. US CPI in June 2022 was 9.1%, above the expected 8.8%.
- When CPI is higher than expected, it tends to lead to rate-hike worries → higher market rates → a shrinking multiple. On release day, check the calendar first.
CPI is not the whole story on inflation. In the next lesson, we compare the PCE price index, which the Fed actually targets, with PPI, the cost-side inflation that companies feel.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. The CPI index went from 200 a year ago to 210 now. What is the YoY inflation rate?
(210 ÷ 200 − 1) × 100 = 5%. It is not that the index rose by 10; you calculate it as a ratio against the comparison point.
Q2. In July 2022, US CPI was 0.0% MoM and 8.5% YoY. What best explains this difference?
MoM shows the 'current pace' versus last month, while YoY is the result accumulated over 12 months. Even if prices pause for one month, the increases of the previous 11 months remain.
Q3. Which statement about core inflation is correct?
Core inflation strips out items that swing widely on temporary shocks to show the underlying trend in prices. Companies' raw material prices are the PPI in the next lesson.
Q4. The inflation rate fell from 6% to 3%. What happened to the average price?
As long as the inflation rate is positive, prices keep rising. The average price only falls when the rate drops below 0%, which is the deflation covered in Lesson 10.
Q5. On CPI release day, the result came in at 4.0%, higher than the 3.7% forecast. What reaction is most likely to appear first in the stock market?
Hotter-than-expected inflation raises the odds of a rate hike. When the discount rate rises, the multiple knob you learned about in Lesson 1 turns down, and growth stocks that depend on earnings far in the future are especially sensitive.
NextTerms · Next lesson · Related tools
The main price indicator showing changes in the prices of goods and services households buy. It is usually released as the rate of increase versus the same month a year earlier.
Core inflationCore inflationInflation excluding food and energy, whose prices swing widely. It is used to look at the underlying trend in prices.
InflationInflationA phenomenon in which prices keep rising across the board. What the same money can buy shrinks.
YoYCompared with the same month a year earlier, YoY (Year over Year)The rate of change compared with the same month (or quarter) a year earlier. It removes seasonal effects and shows the change accumulated over a year, so it is the basic number for inflation releases.
MoMMonth over MonthThe rate of change compared with the immediately preceding month. It shows the pace right now and is usually published as a seasonally adjusted value.
Base effectBase effectA phenomenon in which the number at the comparison base date is unusually high or low, so the current rate of change looks lower or higher than the actual trend. It often appears when reading year-over-year indicators.
ConsensusConsensusThe average forecast of market experts for an economic indicator or company earnings. The gap between the actual release and this figure moves the market.
FedFed, US Federal Reserve SystemThe central bank of the United States. It sets the policy rate with the goals of price stability and maximum employment.
Interest rateInterest rateThe price of borrowing money. When rates rise, the present value of future earnings falls, which tends to lower stock multiples.
P/EPrice-Earnings RatioShare price ÷ EPS. A multiple showing how many times one year's earnings the market pays for a share. It varies greatly with interest rates and investor sentiment.
This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.