Use Consumer Price Index to Forecast Market Trends

Features of the CPI

Consumer Price Index (CPI) is a statistical indicator that measures the price movements of goods and services purchased by consumers. It is considered as one of the indicators that shows the standard of living. Many countries, such as the United States and the United Kingdom, release their consumer price index on a monthly basis. Because the CPI, which shows the changes in the price, is used as the most important indicator of inflation, it is very necessary to pay attention to this index when it is released.

The CPI shows the percentage change of the prices of goods by comparing the consumer prices with the prices released in the reference base month or year. It is usually used as an indicator of inflation and deflation.

In particular, the U.S. consumer price index has an impact on the currencies against the U.S. dollar. It is thus very important for you to pay attention to the index while it is released by the U.S. Bureau of Labor Statistics.

When an investor trades the currency of a resource-rich country, it is necessary to examine the economic indicators of its trading partners. For example, if you trade the Australian dollar, besides Australia’s economic indicators, it is also needed that you look at the indicators of the United States and China at the same time. As the economic indicators of the United States and China have a greater influence on the market, it is said that the less important index, the PPI, can sometimes be ignored.

Release Date of the CPI and Time for Trade

Although many countries release the consumer price index, it is most important to pay attention to the U.S. CPI. The CPI in the United States is released around the 15th of each month, at 8:30 a.m. EST. Large movements of the market may occur when the index is released. The CPI also has a great impact on the monetary policy announced by the Federal Reserve Board.

It is very necessary that you pay close attention to the U.S. consumer price index, which is valued by many investors and media. It is an effective method for investors to analyze the data by region and industry. However, in order to analyze inflation, it is also important not to forget looking at prices of food, clothing and energy.

In the United States, the overall index shows the average price movements in the prices paid by urban consumers, which make up 87% of the total population, for a fixed market basket of goods and services. It is categorized into food, housing, clothing, medical care, education, etc. It is very important that you pay special attention to the core CPI, which is the consumer price index excluding items with high volatility, such as food and energy.

Predicate Trends in the Foreign Exchange Market by Looking at the CPI

Now, let’s take a look at how to forecast the market movements by examining the consumer price index (CPI). If the current CPI number is higher than the one released in previous month, it indicates that the price level of goods has increased. This can be considered as a possible sign of inflation.

When the prices of goods are increased, the value of the currency will decrease. The interest rate will then be raised in order to keep a balance between the goods and currency. If the interest rate is raised, many investors will buy the currency due to its high interest rate. As a result of this, the value of the currency will increase.

The CPI number is higher than the one released in the previous month

A possible sign of inflation

Interest rate is raised as inflation is concerned

Investors buy the currency due to high interest rates

The exchange rate rises

Because the CPI is an indicator that influences the interest rates, it draws the attention from investors. It is also possible to forecast that the interest rate will be lowered when the CPI number is lower than the reference number. To sum up, when the CPI is higher than the previous number, interest rates will be raised, and when the CPI is lower, interest rates will be lowered.

Consumer Price Index (CPI) vs Producer Price Index (PPI)

Besides consumer price index, the U.S. Bureau of Labor Statistics also publishes producer price index (PPI). Together with the CPI, the PPI is used to forecast the inflation rate and rate of price movements. Whereas the CPI shows the purchase price, the PPI shows the selling price. The PPI is estimated by excluding the imported goods, transportation costs, distribution margin, and consumption tax.

Because prices of food and energy are volatile, investors usually look at the Core CPI and PPI, which exclude food and energy prices, to predict the underlying U.S. inflationary pressures.

The PPI is closely correlated with the CPI. When the PPI drops, the CPI will decrease, and when the PPI rises, the CPI will also increase. It is easy to remember this rule, even for a novice investor who lacks sufficient investment knowledge.

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