Inflation
Inflation measures how quickly prices are rising across an economy. The main measure is the Consumer Price Index (CPI), which tracks the cost of a basket of goods and services. Central banks typically target around 2% annual inflation.
When inflation is too high, central banks raise interest rates to cool spending. When it's too low, they cut rates to stimulate demand. CPI releases are among the most market-moving data points because they directly influence rate expectations — which drive currencies, bonds, and equities.
GDP — Gross Domestic Product
GDP measures the total value of goods and services produced by an economy over a specific period. It's the broadest measure of economic health. Positive GDP growth means the economy is expanding; negative growth (especially two consecutive quarters) signals recession.
GDP is released quarterly with a significant lag — the data you're seeing today describes what happened weeks or months ago. This makes it a lagging indicator, useful for confirming trends rather than predicting them. However, surprise GDP readings still move markets because they shape expectations for future central bank action.
Employment Data
Employment indicators — particularly the US Non-Farm Payrolls (NFP) — are closely watched because a strong labour market supports consumer spending, which drives economic growth. Key employment metrics include the unemployment rate, job creation figures, and wage growth.
Wage growth is particularly important because it feeds into inflation. If wages are rising quickly, workers spend more, pushing prices up — which pressures central banks to raise rates. The employment-inflation-rates chain is one of the most important relationships in fundamental analysis.
How They Interact
These three indicators form a cycle. Strong employment drives consumer spending, which pushes up inflation, which prompts central banks to raise rates, which eventually slows employment. Understanding where the economy is in this cycle helps you anticipate central bank actions and position your trades accordingly.
When all three point in the same direction — strong employment, rising inflation, tightening policy — the trading signals are clearest. When they conflict (strong jobs but falling inflation, for example), the outlook becomes more uncertain and markets become more volatile.
Key Takeaways
- CPI measures inflation — directly drives central bank rate expectations
- GDP measures economic output — a lagging but powerful confirmation signal
- NFP and employment data influence inflation expectations and rate policy
- Wage growth is the critical link between employment and inflation
- When all three align, trading signals are strongest; conflicts create volatility
