The CPI and Forex: How CPI Data Affects Currency Prices

By | October 26, 2022

It is used by retailers in predicting future price increases, by employers in calculating salaries, and by the government in determining cost-of-living increases for Social Security. Make sure you bookmark our economic calendar to stay tuned in to the latest CPI data released by a range of countries, and stay abreast of all the DailyFX news and analysis updates. Also, reserve your place at our Central Bank Weekly webinar series to learn about news events, market reactions, and macro trends. The information in this site does not contain (and should not be construed as containing) investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument.

  1. The annual CPI is reported as a whole number, and the figure is often greater than 100 (assuming current market prices are appreciating).
  2. Government agencies, businesses, investors, and traders use it to gauge inflation — the change in the prices of goods and services.
  3. Ideally, within the financial markets, you would generally be looking for the CPI to rise at an annual rate of just 1-2%, as any amount over this would indicate a warning about growing levels of inflation.
  4. The CPI (Consumer Price Index) is a measure of the average change over time in the prices paid by consumers for a basket of goods and services.
  5. While the CPI may seem like complicated economic data, it impacts consumers in a variety of ways, from capturing their purchasing power to determining eligibility and payment amounts of government programs.

We’ll cover what CPI is as a concept, the CPI release dates, how to interpret CPI, and what to consider when trading forex against CPI data. But this shows that when prices rise too fast, eventually it damages markets. The 1970s showed that sudden, massive inflation can crush the markets. To try to slow inflation down, the Federal Reserve raised interest rates a lot. With higher rates, it was more expensive for companies to borrow money.

Reported every month, the index is based on prices of a fixed basket of goods and services, with the prices of the goods and services in the base period set equal to 100. The current period’s prices are then compared to the base period’s prices to calculate the index. CPI is an important tool that aims to illustrate the changes in cost of goods and services over time. The official inflation rate is the calculation of changes in the CPI over a period of time.

How Does CPI Affect the Economy?

Understanding these factors will help you anticipate potential changes in monetary policy. The CPI is a fixed quantity price index and also a form of cost of living index and is considered one of the most useful tools in financial circles as it can provide clues as to movements in inflation. If CPI is increasing, then it gives a central bank such as the Fed the necessary supportive data to hike rates. As can be observed in the example above, as inflation rose during the first half of 2018, the US Dollar Index went up accordingly. But with US inflation drifting lower in the following months and with a missed target of 2%, this pushed US interest rate hikes off the agenda.

Larry Connors’ 3 Day High/Low Method Trading Strategy (Is It Still Effective?)

Therefore, any accounts claiming to represent IG International on Line are unauthorized and should be considered as fake. 70% of retail client accounts lose money when trading CFDs, with this investment provider. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. In response to higher-than-desired inflation rates via the CPI, the Fed adjusts the Fed funds rate.

The CPI report includes a number of tables that break down how various goods and services increased over the past month, as well as the past 12 months. Everyday items, such as meat, vegetables, cleaning supplies and even clothing are tracked. The monthly CPI report starts with a summary bond investment strategies of the findings, including how much inflation either increased or decreased for the month prior, followed by the average change in prices over the past 12 months. The Consumer Price Index (CPI) is a monthly measure of the change in prices paid by consumers for goods and services.

Also, there are also regional CPI, which measures inflation in specific geographic regions, and sector-specific CPI, which measures inflation in specific industries. Each type of CPI can impact investment strategies differently, for example, a rise in energy prices may affect energy companies differently than a rise in food prices will affect food companies. The CPI also includes substitution bias, which means it can overstate how much the cost of living has changed. For example, if the CPI captures a large increase in the price of an item, it doesn’t take into account people substituting that item for a cheaper one. Not taking this into account wrongly assumes that people continue to buy the more expensive item and experience a higher inflation rate than what they’re actually enduring. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors.

This can help them make informed investment decisions and potentially benefit from changes in inflation. Additionally, changes in weather and natural disasters can also impact the prices of certain goods and services, and thereby affect CPI. CPI stands for consumer price index, an average of several consumer goods and services that are used to give an indication of inflation.

For example, lower-income individuals who contribute more gross income towards necessities of shelter and food will skew differently than households with larger disposable income. For this reason, the CPI may not adequately reflect each individual’s experience about costs and changes over time. Subcategories estimate price changes for everything from tomatoes and salad dressing to auto repairs and sporting events tickets. Price change for each subcategory is provided with and without seasonal adjustment. For example, the row holding for 3 days shows the best results of 0.13% average gain.

The following table shows a selection of major economies and information about their CPI releases. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. Stay on top of upcoming market-moving events with our customisable economic calendar. The index rose 0.4% in February 2024 compared to a 0.3% increase in January 2024. Peter Westfall is a distinguished professor of information systems and quantitative sciences at Texas Tech University. He specializes in using statistics in investing, technical analysis, and trading.

This made the dollar weaker, so people could buy less with their money. Mortgage rates (and other forms of long-term debt) are often impacted by rates set by government agencies. As the CPI increases and the government enacts policy changes to slow inflation, rates often increase. On the other hand, landlords may use CPI information to adequately assess what annual rent increases for renters should be. The owners’ equivalent category models the rent equivalent for owner-occupied housing to properly reflect housing costs’ share of consumer spending. User fees and sales or excise taxes are included, while income taxes and the prices of investments such as stocks, bonds, or life insurance policies are not part of the CPI.

Dividend income may also be subject to taxes and interest income from bonds. Additionally, some investments such as commodities and real estate may also be subject to other taxes such as sales tax and property tax. Another difference is that CPI is a lagging indicator, meaning that it reflects economic conditions that have already occurred. Other economic indicators such as Purchasing Managers’ Index (PMI) can be leading indicators, which can give investors an early indication of future economic trends. Additionally, investors can use technical indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) to confirm trends in the data and make more confident trades.

Read more on CPI, inflation and forex

There are several resources for investors to use in learning about trading and investing around CPI. Some examples include financial blogs like this one, financial journals, and TV. Essentially, the CPI is a “basket” of various consumer goods and services that have been purchased by the wage earners of certain urban areas and which have been tracked from month to month. The Bureau of Labor Statistics (BLS) computes the CPI by taking the average weighted cost of a basket of goods in a given month and dividing it by the weighted cost of the same basket the previous month. The release and revision of CPI figures can produce swings in a currency’s value against other currencies, meaning potentially favorable volatility from which skilled traders can benefit. This notion is also widely attributable to individuals with varying degrees of income.

CPI trading strategy #3 – trading rules (the days after the release)

Often, more than one index of consumer prices will be used to judge inflation in a particular economy, with different goods and services being measured to evaluate different sections of the population. When the CPI report is released, it’s essential to consider the current market conditions and the broader economic context. Within the core CPI, some of the more volatile and closely watched components are apparel, tobacco, airfares, and new cars. In addition to tracking the m/m changes in core CPI, the y/y change in core CPI is seen by most economists as the best measure of the underlying inflation rate. Close attention needs to be paid to the “core rate” as this rate excludes volatile energy and food prices to give a more strict measurement of general prices.

The US Bureau of Labor Statistics has reported the CPI monthly since 1913. As you can see, there’s no one-size-fits-all answer – each market has its unique context. Let’s look at three historical examples to try to understand how inflation might impact markets. Because the CPI Index is so crucial to economic policy and decision-making, its methodology has long been controversial, drawing claims it either understates or overstates inflation. A panel of economists commissioned by Congress to study the issue in 1995 concluded the CPI overstated inflation and was followed by calculation changes to better reflect substitution effects.

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