It is very essential to know as to which of the Forex resources are the exact indicators of the economic status and currency strength. One among those is the Consumer price indicator of the CPI. This is a monthly report released every second or third week. With this data the investors can start making decisions intelligently for their platforms of Forex trading.
Consumer Price Index or CPI:
The CPI, that is the consumer price index can also be termed as Retail Price Index (RPI), an index that values the fluctuations in the price for a representative or hypothetical volume of the goods or services like housing, food, clothing, energy and more.., which shows the number bought by the average of the consumers. To put it in simpler words, this is an educated view of the retail sales which also be said as the “cost of Living Index”
Significance of CPI in Forex trading
The Consumer price inflation that is a sustained increase in the price level of the nation’s economy as fely by the consumers in the daily surving expenditure. Most of the people think that the rise in the CPI is what, that causes “the rate of inflation”. It is normally used by the retailers for forecasting the future increase in the prices, by the employers for calculating the pays and it is also used by the government for finding out the cost of living for the social security. The central bank is forced to increase the rate of interest if they observe the sign of inflation. The most popular and widely used one is the CPI. Central banks like the FED get the sufficient supportive data to increase the rates, when the CPI rises. The Country’s currency will become bullish if the interest rates increases.
The information for this report is gathered by the Bureau of Labour statistics that is the BLS, which gets connected to many numbers of the retailers and collects the list of cost for their respective goods and services. The quality assurance then compares the goods with the same type of goods to see that they are of the same quality. This is to make sure that the prices match for the similar variety of goods. For instance, one can’t compare the rate of a silk cloth with that of a cotton one.
The most frequently used commodities for this type of survey are the food, clothing, housing, energy, education, entertainment and medical care. These are the basic necessity commodity that is why these are termed as the cost of living index. This figure is calculated using equations very carefully and gives weight age to frequently utilized items like FOOD. This is the reason for this report being so accurate and it is an indicator for the Forex agents to make predications.
Effect on Inflation
The CPI is the general sign of inflation. The price of the goods will rise when the CPI rises, which means that the workers have to raise the salary sheet as a way to meet their daily demands. Through this report, the Federal Reserve will come to know when they have to interfere in the market place as a way to reverse the trends. The FX trading market will know the effect if only the Fed takes a proper action in the nation’s economy.
Significance of CPI in Forex
While examining in this resource of Forex it is vital to know what the numbers actually refer to. An annual increase of 1 to 2 % for the CPI is considered as a normal one, but something above that range is an indicator of inflation and intervention of the Fed becomes essential. Monthly fluctuations are affected by the deviation of the data like the time of the year of the other prevailing Forex news etc. Or else verify the yearly deviations to see for any long term effects that have taken place, as they provide perfect and accurate estimation of the forth coming change.
How to use CPI in Forex trading
The economic indicators are the main instrument that measures the nation’s economic conditions. Any change in these conditions will have a direct effect on the price and volume of that country’s currency. But it is all the more necessary to know that not only the consumer price indicator is the factor that affects the currency of the nation, it is also equally affected by the Non form Payroll announcements. The currency valuation of the country also drastically depends upon various factors like the technical factors, third party reports and many more.
Useful hints for using the CPI
• Have an economic calendar with you that give you the list of the indicators and at when they are expected to be released. Also keep an eye on the future period of time, on frequently the markets which will move with the anticipation of a particular indicator or on the release of a report at a future time.
• Be informed of the economic indicators that attract most of the market’s attention at any stipulated period of time. These indicators are the main medium for the volume movements and larger prices. For instance, one always keeps an eye on the indicator of the inflation, as to when the US dollar would go weak. Learn about the data from the market expectations, and then lay your attention as to whether or not the expectations are met. This step is more vital than the data. Sometimes, there is a drastic change in between the actual results and the expected ones, if it goes like that, and then makes sure to make possible justifications for this dissimilarity.
• Never react instantly after the news. Many times, the numbers will be revised and changed immediately after their release. Lay your mind to those revisions as they are a very useful tool for finding out the trends and to react more promptly and accurately for the future reports.
Availability and Frequency of the CPI
The consumer price index is released on every second or third week of the covered month at 8:30 EST. This is always released immediately after the release of the Producer price index. Many economic indicators, private reports can also be used to evaluate the basics of the Forex. It is not only important that you just look at the numbers, it is also necessary that you understand what they actually mean and they can affect your country’s economy. If used aptly, these indicators like the consumer price index can be a valuable resource for the currency trader.