Consumer Price Index (CPI) – How Inflation Affects the Forex
The Forex market is influenced by many different factors. Because of the world wide economy, knowing the economic reports in Switzerland may be as important to one trader as what the Yen is doing against the US Dollar. Countries release economic reports to show the health of their local economies, and one of the major reports that all Forex traders look forward to is the Consumer Price Index (CPI).
The CPI acts like a mutual fund of indicators. It takes into account the average price level that is paid by the common consumer for basic goods and services, and covers over 200 different categories from food to medicine to gas to house prices. After assessing all changes in prices for these areas, a report is issued that helps reveal how much inflation is taking place in an economy, and how much pressure that economy is under by these forces.
Inflation is not good for an economy, as rising inflation often makes it harder for consumers in a nation to buy even basic goods, meaning there is less free money for retail sales and spurring economic growth. The CPI report shows how heavily inflation is affecting a nation, and inflation doesn’t just strike an economy that is struggling—in fact inflation can crop up in a booming economy that is growing too fast without any checks or balances!
For example, in an economy that started booming, similar to the way China has grown in recent years, more people make more money. They start buying more. Stores not directly affected notice this, and raise their prices. So the workers demand more money, the company pays more money, and the stores keep raising prices. Without any checks or balances, this economic boom can send the inflation through the roof. A CPI report can show this, and encourage the government and federal banks to counter.
The CPI can sometimes be affected by a large hike in price of one commodity. For example, the huge jump in oil prices in the United States. This affects transportation, heating, food, and cuts into retail sales because of the squeeze on workers’ budgets. In that case, one major commodity jumping in price created a domino effect that the CPI would alert traders and investors to.
As a Forex trader, the CPI will give you critical information about a nation and its economy that can translate to directly affecting a nation’s currency in the Forex market.
From Jason Fielder – Founder, ForexImpact.com