The Consumer Price Index (CPI) is a report that measures the current cost of goods and services, offering insight into how quickly prices are falling and rising, or leaning into price stability. Inflation that is considered normal falls within a target range, but if inflation diverges for too long, it can impact the economy in a significantly negative way. The CPI is the preferred report for forex traders, as it is reported more often than the economist-preferred report in the PCE.
In all honesty, the CPI is limited when it comes to usefulness as an indicator of the economy; It has proven time and again that it is a poor indicator of business cycles. This is all in spite of a logical correlation between demand, economic growth, and raised prices. Inflation was a huge problem in the late 1970s and early 1980s for the United States. Then, as a fallout of the global financial crisis, there was the danger of prolonged price decreases, or deflation, which hurts the economy by encouraging consumers to buy when prices will inevitably become cheaper in the future (given that the price continues to fall). This ultimately creates a venomous cycle of slowing economic growth.
Despite its flaws, the CPI has a profound impact on the forex and stock markets. Just like a multitude of other reports, it is deviation from the expected that has the greatest effect. If, for example, the CPI comes in higher than previously expected, it will give the impression that monetary policy will be tightened in the near future, resulting in a bullish market for the U.S. dollar.