Consumer Price Index : Economic Reports
This to me as a forex trader is the most important economic indicator. I don’t try to scalp it but it gives a general idea as to where the particular currency we are looking at might be heading. Unlike the romours and inuendo that Greenspan has a habit of offering recently at least this is quantifiable .
The Consumer Price Index measures the percentage change in a "basket of goods" to determine the inflation rates. The bureau of Statistics normally uses spending patterns for about 364 different consumer goods. I keep on wondering sometimes if the ipod is one of them .
The CPI is expressed as an index and is compared to a base period. For example if the CPI index for last year was 120 and the CPI index for this year is 122, then prices have risen by ( 122-120)/ 100 = 2% for the year.This can is also used for the monthly CPI data.
Most of the CPI index figures don’t raise by much month to month as it’s not easy in a sound economy to have wide price changes in prices .Unless of course you live in Zimbabwe where bread prices went up 10 times in 2 weeks last month.You wouldn’t want to live in a place like that.
| If CPI is up | If CPI is Down | |
|---|---|---|
| Dollar | Uncertain | Uncertain |
| Bonds | Down | Up |
| Stocks | Down | Up |
The biggest misconception most traders have when trading this index is looking for absolute numbers. Most big investment firms already have an idea of what the CPI is before it is release and are only looking for confirmation on it’s release date. Expectations are what a trader should use to trade this economic indicator.
How the CPI affects the dollar
Stocks and Bonds will usually sell off on a higher than expected CPI report.Since CPI is trying to measure inflation, and if prices are rising faster than expected, consumer purchasing power is diminished, so they may buy fewer goods. This causes company revenues to fall which is reflected in Stock prices.
A good example of this is today’s 148 point stock plunge where the market was worried that there is an ease in inflation in the near term and further confirmed by poor forecasts by Home Depot and Sears and home builder D.R. Horton. Dollar Tumbles
As for the dollar , again there are two possible results
- Usually a percieved higher inflation especially now that the Feds chairman doesn’t sound too confident otherwise, will be viewed negatively and cause the dollar to fall.This is because the dollar’s purchasing power is diminished compared to other currency.
- The other scenario is that though their is higher inflation, if investors think there is going to be a short term rate hike, they may bid up the price of the dollar to take advantage of the higher yields.
At the current market what you as the currency trader should be looking for is any sign that the Feds might raise the interest rates .If they continue talking double speak as they are right now ,then you may be right to assume that there is unexpected inflation and the value of the dollar will continue dropping as it currently is and further stock price drops unless the CPI changes direction or slows down.
I would suggest that you read how to trade fundamentals.
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