| Inflation, Deflation, and the Forex Impact |
 Consumer Price Index (CPI) and its sister indicator, Producer Price Index (PPI) are heavily watched data releases that indicate inflation/deflation trends. CPI does not have a concrete release date, but it is typically midweek in the second or third week of the month. The data is a month to month (MoM) comparison of the two previous months, and it works much like the pH scale. Zero is inflation/deflation neutral. A CPI score above zero is inflation positive, and a score below zero is deflation positive. The data is composed from a survey of households, who are asked to keep a running diary of the cost of certain items. The items surveyed include: food; housing, apparel; transportation; recreation; medical care; education, and miscellaneous goods [1]. Inflation and deflation have far reaching effects on the Forex market. CPI is scrutinized by the Federal Open Market committee (FOMC) when determining its monetary policy. The FOMC aims to keep inflation or deflation at a target rate (present day target is 0.2). The FOMC may raise interest rates to curb inflation, or cut rates to fight deflation. The FOMC may also alter the money supply to achieve its goals. An inflation positive U.S. CPI reading can been seen as bullish by the market if it creeps above the target inflation rate. The expectation is that the FOMC will raise interest rates to combat inflation, thus increasing return on U.S. Dollar associated securities. In healthy economic environments, inflation is a symptom of a growing economy. Inflation in an unhealthy economy marked by high employment is undesirable. Stagflation is the term given to this situation. Stagflation puts a tremendous amount of stress on consumers, as prices increase, but the economy (and likely wages) do not [2]. The role of deflation in the economy is a hotly debated topic. Some economists maintain controlled deflation is good for a recovery since it increases a currency's spending power. However, when a currency becomes too strong, global demand for a country's goods wanes due to increased prices abroad. Fewer exports hurts GDP, and compounds the effects of a recession. The Great Depression is an example of unchecked deflation contributing to an already dire situation. CPI readings below zero may also be interpreted as U.S. Dollar positive, as lower prices indicate a flight to safety by lenders and investors. The Forex market reaction to CPI data is often dynamic, and hinges greatly on the current economic environment at the time of the news release. It is important to consider where the current Federal Funds rate is in relation to the CPI data. Is there room for a rate cut? What is the current interest rate compared to other nations'? When all factors are considered, CPI data gives the individual Forex trader insight into possible future FOMC moves. Sources: Bureau of Labor Statistics, http://www.bls.gov/cpi/cpifaq.htm [1] http://www.investopedia.com/terms/s/stagflation.asp [2] |
| Related articles: |
|---|
|
International Association of Forex Traders
Company: International Association of Forex Traders
Number of participants: 30,000
Amount of payouts: 1,500,000$
Number of partner-brokers: 62
Number of payment systems: 8
eToro Forex Broker
eToro Broker Reviews
Notes: Weekly Championship
Min Account: 50$
Spread: 2 Pips
Plus500 Forex Broker
Notes: No commissions! - fixed spreads
Min Account: 100$
Trade Stocks, Forex, CFDs, Indices, Oil and more
FXCM
FXCM Review >>
Notes: FOREX and CFDs
Min Account: $25
Max Leverage: 1:100
AskoBid
askoBid Broker Review
Notes: Simple and new broker
Bonus: 30% reward on first deposit
Search
