Inflation is the boundary condition on everything else here. A central bank can support growth, employment and markets right up to the point where prices force it to stop, and this is the view that says where that point is.

The target itself is an agreed number rather than anything the economy insists on. It was settled at a level meant to be small enough that nobody plans around it and large enough to keep some distance from prices going backwards, and policy is judged against it.

What it actually measures

The distance from target is what matters, not the absolute number. A reading well above target removes the option to ease no matter what growth is doing, and a reading close to it hands that option back.

Prices are measured against the same month a year earlier, which builds in a long memory. A month that ran unusually hot a year ago flatters this year’s reading without anything having improved in the meantime.

Falling below target is its own condition. It hands policy room to act and it arrives because demand is weak, so the room comes with the reason it is needed.

Cooling prices are the good news that arrives with bad news attached

Falling inflation gets reported as an unambiguous improvement, and above target it usually is. Below target it means demand has weakened enough to stop firms raising prices, which is not a recovery.

The distinction matters for what follows. Easing into an inflation problem that has been solved is supportive; easing into an inflation problem that vanished because spending collapsed is a response to something worse.

What it does not tell you

The print is old by the time it lands. Consumer prices publish monthly and in arrears, so this is the most recent measurement rather than current conditions.

It is an average across a basket, and nobody buys the basket. Individual experience of price changes can differ from the headline by a wide margin, which is why a reading described as comfortable can feel like nothing of the sort.

Markets price the expectation, not the print. A number that surprises moves things; a number that confirms what was already assumed usually does not, which is how a high reading and a rally can arrive on the same morning.

How to read it

Hot. Price growth is quick enough that policy has no room to loosen.

Above target. Still uncomfortable, and no longer extreme.

Near target. The comfortable range, where policy can respond to growth instead.

Cooling. Falling faster than intended, which carries its own concerns.

Inflation sits among the views on the Macro dashboard, next to Real Yields, Fed Policy and GDP Growth.

Common questions

Why is the target around two per cent?

It was picked as small enough that households and firms do not plan around it, while leaving some distance from prices falling outright. The figure is an agreement rather than a discovery.

Why is cooling shown as a caution?

Because inflation dropping well below target usually means demand has weakened. It gives policy room to act, and the reason it has that room is not a good one.

How current is the reading?

Not very. Consumer prices publish monthly and in arrears, so this is the latest measurement rather than a description of today.

Why does the year-ago comparison matter?

Because it carries a long memory. An unusually high month a year ago makes this year’s figure look better without anything having changed in the meantime.

Why do markets sometimes ignore the number?

Because they trade the expectation rather than the measurement. A print that matches what was already assumed changes nothing, and only the gap between the two moves anything.