PPI, CPI, PCE, and NFP Jobs

These four reports matter because they change what the street thinks the Fed will do with rates. Below we will break each down so you can prepare for future high impact news events.

What the Fed is actually watching

Two things.

1.  Inflation near their target.

2.  A labor market that is not falling apart.

If inflation stays sticky or jobs stay too hot, they have no reason to cut.

If both cool, they do.

That is the whole game. Each report below is just a different camera/viewpoint on that same question the market cares about.

The order they hit you in

(in depth breakdowns of each below)

Costs start at the factory. That is PPI.

Those costs show up in what you pay. That is CPI.

The Fed reads their own version of that story. That is PCE.

Jobs decide if they even have permission to ease. That is NFP.

Read them in that chain and the month makes more sense.

PPI

Producer Price Index. Comes from the Bureau of Labor Statistics.

This is what producers get paid before the price hits the store. Factory, wholesale, and upstream. If it costs more to make the thing or import it, it often costs more to buy the item later. That is CPI.

Why it matters. PPI is not the number the Fed targets. It is the warning shot. The street uses it to guess what CPI will do next.

Hot PPI. The street starts leaning that CPI comes in hot. Cut odds can get sold before CPI even prints. That is PPI leaking into the next report.

Soft PPI. Heat comes off CPI. Cut odds can stabilize going into the consumer print. Headline PPI can get juiced by energy. The main thing to watch is Core PPI. This is the cleaner look at whether costs are actually spreading.

I treat PPI as the setup print of the inflation week. Not the main event. It tells you how the street will be positioned for CPI.

CPI

Consumer Price Index. Also from the Bureau of Labor Statistics.

This is what households actually pay. Rent, groceries, insurance, etc.

Headline CPI includes food and energy. Those swing around. Same as PPI.

The main thing to watch is Core CPI. It takes food and energy out so you can see the sticky trend. Shelter is a huge weight in CPI. That is why CPI can look hotter than PCE in the same month. Both can be right. They are just weighted different.

Why it matters. CPI is the one that hits the tape first. It rewrites the month’s rate story before PCE even comes out. Bonds and yields move fast off this print and can sometimes be the lead indicator of the move being front ran.

Hot CPI or hot core. The Fed has less room to cut. Higher for longer gets bid.

Soft CPI or soft core. Cut odds come back. That is when squeeze risk goes up.

CPI also sets the tone for PCE. A hot CPI makes the street need a soft PCE to walk it back. A soft CPI makes PCE less of a landmine unless it surprises hot.

By now hopefully you’re seeing the pattern and how each one reacts off the other.

PCE

Personal Consumption Expenditures. Comes from the Bureau of Economic Analysis. This is the key inflation number the Fed actually targets. Broader than CPI. It adjusts when people switch to cheaper goods. Shelter/housing weighs less here than it does in CPI.

Why it matters. CPI is what the market trades. PCE is what shows up in the Fed statement. A hot CPI can scare the tape and still get walked back if PCE comes in soft. Both coming in hot into a meeting is when cut hopes die. I do not treat PCE as a separate system. It confirms or contradicts the CPI story in my opinion.

Hot CPI and soft PCE. The hawkish read loses a leg. Cut odds can come back and risk-on sentiment is typically the outcome.

Both hot into the meeting. They do not have cover to cut. Risk-off sentiment is typically what you see here.

PCE is the last inflation word before they have to explain themselves. That is why it still matters even though it prints late and moves less than CPI on the day.

NFP

Nonfarm payrolls. The jobs report that matters the most. Usually the first Friday of the month.

This is the other half of the Fed’s job. Inflation tells them if they should ease. Jobs tell them if they can. A labor market that is still tight means cutting rates risks pouring fuel on wage inflation. A labor market that is clearly cooling gives them cover.

People get this print backwards. A “good” jobs number can dump the market.

Hot payrolls means labor is not cooling. The Fed is less likely to cut. The index can reprice lower.

Soft payrolls means cut odds go up. The market can lift.

The report is three parts. Read all three.

1.  Payrolls tell you if hiring is still hot.

2.  Unemployment tells you the other side.

3.  Average hourly earnings tell you if wages are still feeding inflation. This is the one often overlooked. But my main data point I’m watching for inflation purposes. They have a hard time cutting rates when consumer spending is strong. High average hourly earnings and payrolls lead to the same or more consumer spending.

How they feed the next print

(one last time to tie it all together)

PPI sets the lean for CPI. Hot factory prices make a hot consumer print more likely in the street’s head. Soft PPI takes that lean off.

CPI sets the lean for PCE. Hot CPI means PCE has to come in soft or the hawkish story sticks. Soft CPI means PCE only becomes a problem if it surprises hot.

PCE is what they take into the meeting. That is the inflation verdict they have to stand on.

NFP sits beside all of that. Even soft inflation does not give them a clean cut if jobs and wages are still running hot. Even a hot CPI can get looked through later if the labor market is clearly breaking.

That is why these four sit on the calendar. Not because the headline is interesting. Because each one changes whether the Fed has room to move.