What is the Consumer Price Index in forex trading

It is important to know which Forex resources are accurate indicators of economic status and currency strength. One such indicator is the Consumer Price Index (CPI), a monthly report that is released around the second or third week. With this information, investors can begin making intelligent decisions on their Forex trading platforms.

The Consumer Price Index

The Consumer Price Index, also referred to as the Retail Price Index, is an index that measures the change in price for a hypothetical (representative) quantity of goods and services such as food, energy, housing, clothing etc, which represents the number purchased by the average consumer. In simpler terms, it is an educated projection of retail sales, also known as the ‘cost of living index’

Importance of CPI in forex trading

The CPI measures inflation (a sustained rise in prices in an economy) as experienced by consumers in their day-to-day living expenses. The increase in the CPI is what most people think of as the “inflation rate.” 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. Signs of inflation means the central bank has to raise interest rates. The most widely used indicator of inflation is CPI. If CPI is increasing, then it gives a central bank such as the Fed the necessary supportive data to hike rates. Higher interest rates are bullish for the country’s currency.

The data for this report is collected by the Bureau of Labor Statistics (BLS), which contacts thousands of retailers and gathers a list of prices for their goods and services. Quality assurance compares these goods with similar products to ensure that they are of similar quality. This is to make certain that prices are for the same quality product; for example you would not want to compare the value of a silk shirt with one made from cotton.

Some of the common goods that are included in the survey are clothing, food, energy, housing, transportation, medical care, entertainment, and education. These are typically thought of as basic necessities, which is why this is also called the “cost-of-living index.” The equations used to calculate this figure are carefully designed and give more weight to high volume items that are purchased more frequently, like food. That is why this report is so accurate an indicator for Forex brokers to make predictions.

Effect on Inflation

The Consumer Price Index is the most common indicator of inflation. When the CPI is higher, it possible that inflation is going to raise the price of goods, meaning that employers will need to increase payroll in order to meet the minimum cost of living. This report informs the Federal Reserve when to intervene in the market in order to reverse trends. Whenever the Fed takes action in the economy, the FX trading market is sure to feel the effects.

Significance of Consumer Price Index in forex

When investigating this Forex resource, it is important to understand what the numbers indicate. A 1-2% annual increase is normal for the Consumer Price Index, but anything greater could be a sign of inflation and impending Fed intervention. Monthly changes could be influenced by aberrations in the data, such as time of year of other current Forex news. Instead, check yearly differences to see if any long-term effects have occurred, as they will provide a more accurate estimation of future change.

How can the Consumer Price index be used in forex trading

Since economic indicators gauge a country’s economic state, changes in the conditions reported will therefore directly affect the price and volume of a country’s currency.
It is important to keep in mind, however, that the Consumer price indicator along with other indicators such as Non Farm Payroll announcements are not the only things that affect a currency’s price. There are third-party reports, technical factors, and many other things that also can drastically affect a currency’s valuation.

Useful tips for using Consumer Price Index

  • Keep an economic calendar on hand that lists the indicators and when they are due to be released. Also, keep an eye on the future; often markets will move in anticipation of a certain indicator or report due to be released at a later time.
  • Be informed about the economic indicators that are capturing most of the market’s attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most watched indicators.Know the market expectations for the data, and then pay attention to whether or not the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results and, if there is, be aware of the possible justifications for this difference.
  • Don’t react too quickly to the news. Oftentimes, numbers are released and then revised, and things can change quickly. Pay attention to these revisions, as they may be a useful tool for seeing the trends and reacting more accurately to future reports.

CPI availability and frequency

The Consumer Price Index is released at 8:30am EST on the second or third week following the month being covered. Always released after the Producer Price Index. There are many economic indicators, and even more private reports that can be used to evaluate the fundamentals of forex. It’s important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation’s economy. When properly used, these indicators such as the Consumer Price Index can be an invaluable resource for any currency trader.

About the author: Editorial Team

ForexPromos Editorial Team is comprised of a selection of hand picked editors that bring you the latest breaking news from the financial markets. We also provide forex educative articles as well as comprehensive fx broker reviews.

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