Hey everyone, I'm still trying to get my head around how to best weigh core CPI versus headline CPI prints. Sometimes they diverge significantly, and I'm not always sure which one the market is going to focus on more heavily for rate hike expectations. Do you generally lean more on one, or is it more about the trend in both?
It's a good question because the market's focus can indeed shift. Generally, the Fed often emphasizes core CPI as a better indicator of underlying inflation trends, given the volatility of energy and food. However, headline CPI can still drive sentiment if the divergence is extreme or sustained, as it directly impacts consumers' wallets and broader economic perception.
Usually, the market focuses on core CPI for underlying inflation trends, as it strips out volatile food and energy. However, if headline inflation stays stubbornly high due to those components, the Fed can't just ignore it, which complicates things.