Inflation is defined as increases in pricing for goods and services. Forex traders examine economic indicators that attempt to measure inflation because inflation suggests a country’s economy is growing. Forex traders see rising inflation as a sign of surplus money in a country’s economy which would possibly prompt the central bank to attempt to reduce inflation by raising interest rates. The Consumer Price Index (CPI) is one of the most important economic indicators for measuring inflation.
What exactly is CPI measuring?
The CPI measures the cost of purchasing a defined basket of services and goods in an economy. The CPI figure is expressed as an index with 100 as a starting value. For example, a CPI reading of 112 signals that it now costs 12 percent more to purchase the same assortment of goods and services than when the starting index value had been first determined. The goods commonly measured in a country’s CPI are transportation, housing, food, medical care and leisure.
How CPI Figures Affect Currency Markets
Just like with most other economic indicators, the CPI figure is usually compared with the previously estimated figure. If the actual CPI figure is higher than estimates, this could cause the country’s currency to rise against other currencies. However, a lower-than-expected actual CPI figure can be bearish for the particular currency.
On the other hand, in some cases if inflation increases too fast it can be detrimental to a nation’s economy. If prices rise faster than wages it could weaken consumer buying power and ultimately stifle economic growth. Also, other economic data should also be used in determining inflation’s effect on the value of a country’s currency.
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Sources:
- http://fxtrade.oanda.com/learn/intro-to-currency-trading/fundamental-analysis/monetary-policy
- http://easyforextrading.co/how-to-trade/inflation/
- http://www.investopedia.com/articles/07/consumerpriceindex.asp
- http://www.forextraders.com/forex-analysis/forex-fundamental-analysis/the-influential-cpi-data-and-its-forex-market-impact.html
