12 Month CPI
Using the 12-Month CPI to Navigate Market Futures: An InSight Perspective
At InSight, one of our core responsibilities is to interpret economic signals that shape both market conditions and client strategy. Among the most influential indicators we monitor is the 12-month Consumer Price Index (CPI) reading—a key measure of inflation that reflects the percentage change in prices for a basket of goods and services over the past year.
Why the 12-Month CPI Matters
The 12-month CPI offers a crucial, long-term perspective on inflation trends, helping us move beyond the noise of month-to-month volatility. It anchors our understanding of how persistent or transitory inflationary pressures may be, which is essential for handicapping both Federal Reserve policy decisions and broader market sentiment.
Sticky vs. Transitory Inflation: A sustained high 12-month CPI reading suggests entrenched inflationary pressures, potentially leading to prolonged tight monetary policy. Conversely, a declining CPI trend can signal that inflation is cooling, increasing the odds of rate cuts or easing.
Real Yields and Discount Rates: CPI affects real yields by altering the perceived return after inflation. Higher CPI readings raise the inflation risk premium, impacting the present value of future earnings and thus equity valuations.
Sector-Level Impacts: Certain sectors—like energy, consumer staples, or utilities—respond differently to inflation. A persistently high CPI reading may signal continued strength in inflation-protected sectors, while a cooling CPI opens opportunities in growth and rate-sensitive segments like tech or real estate.
How InSight Uses CPI to Forecast Market Trends
At InSight, we don’t just look at headline CPI—we dissect the components. We distinguish between core (excluding food and energy) and headline inflation, track month-over-month momentum, and overlay trends like shelter inflation and services inflation to understand what’s “sticky” and what’s rolling over.
We use the CPI to:
Model Fed Policy Pathways: By interpreting how CPI aligns with the Fed’s dual mandate (price stability and maximum employment), we can project rate policy scenarios and their market implications.
Adjust Portfolio Positioning: A disinflationary trend in CPI may lead us to lean into duration (longer bonds), reduce overweight in inflation beneficiaries, or increase exposure to rate-sensitive equities.
Assess Real Return Expectations: We evaluate the real return on cash, bonds, and equities by comparing expected nominal returns against the inflation trend implied by CPI. This guides our asset allocation decisions and client communication.
The Forward-Looking Edge
Rather than reacting to CPI prints in isolation, InSight integrates CPI trend analysis with earnings data, labor market conditions, and global macro signals to build a forward-looking, probability-weighted outlook. This holistic approach helps us anticipate market inflection points and guide clients through periods of volatility with informed, disciplined decision-making.