Inflation Indicators

Not all the economic indicators are equally important as inflation indicators. Traders keep track of the rates’ behavior as the means of fighting with inflation used by central banks is increasing the interest rate which, in its turn, is favorable for the exchange rate.

The reaction of forex to the data on inflation depends on the business cycle stage. If at the stage of growth there appear markers of inflation central banks can take forward steps by increasing the interest rate. In this case, from the view of forex, the main factor will be an increasing interest bearing differential in favor of the currency what will result in the exchange rate rise.

On the other hand, when the inflation gathers pace at the peak of the business cycle it can encourage severe recession. What measure will central banks take? They will raise the interest rates in order to slow down the business activity but the forex market will have an opposite reaction.

Taking into account what awaits the economics (recession, drop in investment volumes, external trade problems) the trader will start selling the currency and all the assets connected with it. All these consequences will influence the exchange rate drop.

The main inflation indicators in all the countries are consumer price index and producer price index.

Consumer Price Index

Consumer price index, CPI measures the changes in prices of goods and services included to the consumer basket incorporating the goods of permanent demand (food, clothes, oil, transport, medical services and so on). The typical characteristics of CPI are the following:

  • - the largest volatility in the prices of food and energy generators
  • - the inflation in the sphere of services legs behind the inflation on the goods market approximately for a period of 6-9 months
  • - the inflation has its own cycle falling behind the common cycle of economic growth

Producer Price Index

Producer price index, PPI examines the changes in prices at which national businesses sell their goods on the wholesale. PPI covers all the production stages (raw materials, intermediate stages, already finished products) and industrial sectors (manufacturing, output, agriculture). The prices of the imported goods are not considered by PPI but impact it through the prices of the imported materials and components. It is admitted that PPI index is a little bit inflate the real inflation indicator in a country as it is figured out on the basis of the fixed basket and does not consider new goods and services, seasonal discounts but rely only on the price fixed by the sellers. But PPI index is used by financial analysts to make prognoses on the exchange rates movements on forex.

The characteristics of PPI are the following:

  • - more volatility than CPI
  • - it has its own cycle like CPI
  • - the peak PPI indicators generally remain behind from the common peaks of business activity for 3-6 months