Inflation sits at the heart of modern currency moves because it dictates what central banks do with interest rates. Understanding CPI and real yields explains much of what drives FX.
CPI and why it matters
The Consumer Price Index (CPI) measures inflation. High or rising inflation pressures central banks to raise rates (often currency-supportive); falling inflation gives room to cut. CPI releases are among the highest-impact events on the calendar.
Real yields
A nominal yield minus inflation gives the real yield — the true return after inflation. Currencies often follow real yields: a country with high nominal rates but even higher inflation may have a weak real yield, and a weak currency. Nominal numbers can mislead; real yields tell the deeper story.
Putting it together
The chain is: inflation data → rate expectations → real-yield shifts → currency moves. Watching how a CPI surprise changes the expected path of rates explains why a currency reacts the way it does, sometimes counter to the headline.
Key takeaways
- CPI measures inflation; surprises strongly shift rate expectations.
- Real yield = nominal yield − inflation; currencies often track real yields.
- Inflation → rate expectations → real yields → currency direction.