What is the Consumer Price Index? This is an explanation and effect on the Forex market
The Consumer Price Index or CPI is an indicator that shows the average price change at the consumer level. CPI data is very useful to see inflation benchmarks because this data takes into account the purchasing power and changes in prices of goods and services at the consumer level.
When CPI data continues to increase, this can be a positive sign and shows economic growth. Likewise when the CPI experienced a weakening which showed that the economy was sluggish. When the economy is sluggish, the Central Bank will establish a loose monetary policy such as starting market operations and reducing interest rates.
Although a high CPI shows a stretching economy, if the value is too high it will make hyperinflation happen. When this happens, the action taken by the Central Bank is to start tightening monetary policy by increasing interest rates and starting to reduce the amount of money in circulation.
So, the CPI’s good and ideal values are when it is at a stable level. Viewed from the trading side, the increasing CPI value indicates good economic growth and this will stimulate the Central Bank to make strict policies.
Type of Consumer Price Index
CPI has a very big impact on price movements in the market, this is what makes the CPI type differentiated into certain types. 2 types of CPI used are Core CPI and Total CPI.
CPI Core is a consumer-level price index that does not take into account the food, beverage, and fuel side. This is done because the 3 sectors mentioned have a very high level of price fluctuations.
In certain currencies, Core CPI is considered more as data that has a higher impact than the Total CPI.
CPI and Forex Trading
CPI becomes an indicator that has a high impact because it can be an indicator of economic growth. Usually, CPI data that is released out of expectation can have a major effect on price movements.
For example, when the US CPI increases more than the Forecast, the market will increase the bull position on the USD and this will make the price strengthen significantly. Likewise, when the CPI decreases lower than projected, this could drop the USD value. This happens because the market will be busy leaving currencies experiencing economic weakness.
The CPI indicator is considered important data because it can be an indicator that determines the policies of the Central Bank. When the Fed starts to be expected to change interest rates, the CPI data will be used as a benchmark to see the direction of the Fed’s policy.
Seeing the Influence of the CPI on the Forex Market
The thing you need to understand here is the forex market will be influenced by various kinds of factors that are interrelated between one another. Each country will release an economic report that will show the economic health of the country and one of the most anticipated important data is the CPI indicator.
This indicator is considered important because the data takes into account the average price level paid by consumers for goods and services. The prices of goods and services are considered very large because there are more than 200 different categories.
If you have assessed the price changes for the region, then the report will be used to help find how much inflation is happening in the economy.
Assess CPI Data
Inflation that occurs in the economy is not a good thing, because when inflation occurs, consumers in a country will be increasingly difficult to buy basic goods such as food and beverages.
Thus the released Consumer Price Index report will show how inflation affects the country and its people.
The example of inflation that we can convey is in a booming economy. This is very similar to China which has experienced development in recent years. When more people get more money, then they start buying more, and usually, sellers don’t immediately see this and immediately increase their prices.
Also, the CPI can be affected by a large increase in the price of one particular commodity, for example only a large surge in oil prices. When this happens, it will certainly affect the transportation, food, and other sectors. Changes in prices on one commodity can influence and create a domino effect on the economy.
Overall, traders need to use the Consumer Price Index indicator. This is because this indicator can provide very important information about an economy and can translate directly whether there is an influence on the currency or not.
CPI is a fundamental indicator that is very reliable and you can use it to estimate prices in the future.
Such is the discussion that we can convey regarding the CPI that influences forex. If there are still some explanations above that make you confused and do not understand, please just ask us through the comments column below. We will be happy to help with the problems you face and answer any questions that come in.
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