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CPI Forex indicator is one of the useful and most used indicators in Forex trading. CPI is an abbreviation of the Consumer Price Index. So, what does the mentioned term exactly mean? What does it measure and what are the things to know about it?
When the cost of things rises that is the price of goods and services, it is called inflation. A little rate of inflation can be a positive thing for the economy, however, too much inflation can cause all sorts of problems. When the inflation rate runs too high it has been known to initiate downturns in the economy to create or contribute to recessions. because of that policymakers, traders, and economists like to keep a close eye on what’s going on with inflation. Trouble for the traders is that the GDP report comes out every quarter and it’s not timely to make decisions depending on the published information. So, traders prefer a more timely look at inflation so they most likely are using the Consumer Price Index or PPI, which is the Producer Price Index.
CPI is one of the most used indexes for defining economic-related issues, most importantly it shows the inflation rate. So, the local Central Banks are extremely interested to calculate the CPI to define the future monetary policy and the strategy to act in the future. In this guide, you’ll get more information about CPI, how it works and how traders can use it in Forex trading.
What is Consumer Price Index?
The Consumer Price index is an index that measures the changes in the prices of the consumers’ basket of goods and services. This means, that the basket includes several kinds of services and products. To make the Consumer Price index explained, let’s take an example. For instance, one of the main things, the fills the country’s budgets are the money that is spent on the services and the goods. So, this involves several types of fields, like Apparel, Food and Beverages, Apparel, Education, Medical Care, Transportation, and so on. People who are spending their money on the above-mentioned things promote the country’s economy to develop and improve. What’s significant, though the spending money they are making strong the national currency value. So, if people spend a lot, it means that the economy goes well and the positive changes reflect respectively on the national currency value and it gets strong relative to other foreign currencies.
How to Calculate the CPI?
Many traders, who want to predict the future while trading Forex, are interested in how is the CPI calculated? In this part of the article, you’ll get detailed information about the calculating of the CPI.
Firstly, it should be said, that the CPI as an index isn’t the fixed index and it changes year by year. The main reason beyond that is the changes that are taking place in the country. For example, some factors, like changing of the geopolitical condition, the rising of the unemployment rate, changes in monetary policy can affect the CPI.
What’s more, you need to consider, that all the categories include their sub-categories. For example, when in the charter of CPI you see the category of the Food and Beverages, you should know, that the Food and Beverages are divided into several parts. For example, Food and Beverages involve the products like water, alcoholic beverage, Meat, Fruits, Vegetables, and so on. Calculating the Consumer Price index not only furnishes countries with information about the inflation rate but also, tells a lot about people’s demand for certain things. For example, if the CPI index shows, that the spent money on transportation has risen and the inflation rate stayed the same, this means, that the demand for transportation-related things has grown, Through the information, suppliers can raise their service prices and get more profit. However, here’s the main thing behind that, the price changes may lead a certain service supplier to decrease the number of consumers. Besides, the decrease in the number of consumers doesn’t always mean a decrease in revenue. The main idea is to find the most optimal price on the market.
For calculating the CPI there’s the Consumer Price Index formula. This formula is very simple and shows the Consumer Price Index in the present. For calculating this you need to have the data of the cost of the market basket in the current period, also, cost of the market basket in the base period. After getting the data, you can calculate the current CPI, with the mathematical operations. The rate of the cost of the market basket in the current period should be divided by the index of the cost of the market basket in the base period and then the result would be multiplied by 100.
After conducting the above-mentioned operations, you’ll get the result, which shows the consumer price index in the current period. For avoiding complications and mechanical errors while calculating, there is a consumer price index calculator, which supports people with quick results, so they don’t need to lose their time on the searching of certain data and the things, that are necessary for calculating the CPI. The variable in the CPI formula called the cost of the market in the base period means that you need to take a certain time period for comparing the changes in the CPI. To make it more simple, let’s take an example. Let’s say that you want to calculate how the CPI changed from 2009 to 2010. The first thing, you need to find is the cost of the market basket in the current period. So, imagine that you are in 2010 and you need to find the mentioned data for the 2010 year. Tha you have to find the cost of the market basket in the base period, which is in this case the data of 2009. To make everything simple, you can just find the consumer price index table online, where there is information about all the things you need to know about the CPI.
It should be said, that the inflation rate can be changed from time to time and there are several reasons beyond that. However, it is considered, that an inflation rate of 2% is good for developing the country’s economy. Why is that so? Many people think that inflation is a bad thing, but that’s not always true. A little inflation rate helps the market to be regulated and increase production. For example, when there’s a little inflation it means that more money is spent on the services and it helps to aggregate the demand. The aggregated demand per se causes the increased production in the way to meet the demand on the market. After understanding the CPI definition and the way it can be calculated, it’s time to see how does it affect Forex trading and the processes that are taking place in the above-mentioned market.
The CPI’s Effect on Forex Trading
Depending on the above-given information, it goes without saying that the CPI has a significant effect on the interest rates and the way a certain currency’s value changes. So, as long, as Forex trading is oriented on trading with the currency pairs and in Forex the value of each currency have a significant meaning for conducting the trade-related processes, the CPI has an important effect on Forex trading. To make it more simple to understand how does consumer price index affect Forex trading, let’s take a simple example.
Imagine, that the published data of the CPI shows the inflation rate of 1% for the current period. This can be one of the indicators of cutting the interest rates by local Central Banks. The cutting of interest rates can negatively affect a certain currency value. So, the local Central Bank’s monetary policy is most likely to go the way, as already mentioned above. For this reason, the traders are awaiting the weakening of a certain currency. For example, if you are a resident of the UK and your national currency is GBP you know that the British Pound is going to get weak relative to other major currencies like USD. So, the main idea is that you are rejecting to trade with your national currency in order to avoid money loss. CPI effect on Forex trading can be defined in this way, as well. For painting the profits and get rid of losing funds you as a trader, in this case, prefer to trade with an indirect quotation. Trading through indirect quotation means that you are trading with the currency pairs, that doesn’t include your domestic currency. You are starting to choose the currency pairs among available trading currency pairs, that are going to get you additional earnings and profits.
However, let’s get n opposite example. Imagine that the inflation rate is about 3%. In this case, the local Central Bank is going to encourage people to demand the national currency. So, the monetary policy of the local Central Bank is going to develop the way to get you profits and gains through currency trading.
What’s more, it should be said, that the CPI has a significant role in defining your own strategy. Having strategy in the Forex means a lot. As long as the Forex market is volatile and unstable you need to count every step to make rational decisions, that are going to get you bountiful profits.
Furthermore, you don’t have to consider only the CPI rate while trading Forex. There are several factors, that affect the market changes and the currency values.
Many people think that the CPI can only be used for measuring the inflation rate. Even though that the main idea of the CPI is to define the inflation rate for the current period, there are some other things, that are measured by the rate of the CPI. One of the main things among them is the measuring of deflation. So, what is deflation? Deflation is the process that happens when the inflation rate goes below 0%. It means, that the general level of prices in the economy is reducing and the consumers are allowed to get the services or goods at lower prices. This encourages them to spend more money on the things they need. After the deflation process and the increased demand for things and services, the prices are going to grow in a long run and that’s one of the main indicators of strengthening a certain currency value. However, deflation can be a negative thing for the economy as well. It may lead the country to a financial crisis. A financial crisis can damage the country’s economy and can lead the country to deteriorate its economic environment.
Final Words
Depending on the above-written information it can be said, that the CPI rate shows not only the inflation rate but also helps people to foresee the future changes in the country’s monetary policy. This kind of data allows traders to generate their own strategy and the steps they are going to take in the future while trading Forex.
CPI, also, can be one of the main indicators of the quality people leaves in a certain country. What’s more, through the CPI index, traders can decide, whether it worth is trading with a certain currency or not. If the CPI shows that inflation or deflation is going to happen or rise, you can plan the ways you are going to trade in the future. You can also use hedging to protect your funds and avoid losing money.
Also, you should consider the fact, that the CPI rate has both short-term and long-term effects. In short term, you may find depending on the CPI data that trading can be beneficial for you, while trading in the long-term may lead you to lose your gained profits or the deposited funds on your account. So, you, as a trader, can define what is your strategy through the CPI data and decide, whether it worth it to place large traders for the long-term or not and whether it can be profitable for you to go short or long.
To conclude, the CPI has an important meaning for the economy, its changes, and the monetary policy a certain country is going to implement. Besides, the CPI rate can be found online. And what’s important, you don’t have to forget, that the CPI isn’t the only thing that you have to consider while trading Forex. You need to observe the economic calendar, analyzing tools, that can be found on almost every trading platform, and decide whether it worth placing large trades or not and whether it’s rational to trade with certain currency pairs or not.