CPI Week – Important Economic Event
To continue our series of recurring important economic events, we remind you of one that will be of very great importance this week. We’re clearly talking about the Consumer Price Index, more widely known by its acronym – the CPI. Continue reading to find out what it is, which are the assets it impacts and what kind of volatility it can cause in the markets.
What is the CPI?
The CPI measures the average price from a group of predefined consumer goods and services – known in the financial market as Basket of Goods. It is used to determine inflation (as felt by consumers), calculating by how much the value of certain assets has increased or decreased over a predetermined period of time. The CPI is usually released on a monthly, quarterly or yearly basis.
The Consumer Price Index is used to identify the total price level of an economy, and measure the purchasing power of the country’s currency, while also relying on the individual consumption patterns. The US CPI is calculated on a monthly basis by the US Bureau of Labour Statics (BLS).
What is interesting about it, is the fact that although the BLS has kept records on it since 1913, they’re basing the calculations on the index average for the period between 1982 and 1984. During those years the CPI was set at 100, which is why a reading of 175 now would indicate an increase of 75% in inflation, from the levels of 1984.
Why is the CPI important?
Traders should pay great attention to this report, especially if they want to better track the economic policy’s effectiveness. You see, measuring inflation is the best way to analyse how well a set of economic rules are performing, over a predetermined period of time.
The CPI is especially important since it analyses what all categories of people are doing, from the professionals to the unemployed, retired or self-employed and even the country’ low-income people. However, it doesn’t include in its measurements savings or investments.
If you still haven’t caught onto it, the CPI is one of the main reports you should follow if you’re trying to create a trading plan specifically for the Federal Open Market Committee (FOMC) in the case of the US, or the Interest Rates for the rest of the world.
However, that’s not all the CPI defines, as it can also impact retail sales, earnings, or the currency’s purchasing power. The Consumer Price Index has an inverse relationship with the currency, in the sense that when the CPI is positive the currency’s purchasing power drops and vice versa.
In fact, a quick look at the previous US CPI result will reveal that on the 10th of April at 13.30 London Time, when the report came out way lower than anticipated, the USD gained strength and started an uptrend against its main competitors.
What kind of movements can it cause?
Clearly the CPI doesn’t just reflect the US’ economic conditions, but those of every other country, and based on geopolitical constituents and recurrency, it can produce different levels of volatility in the markets.
If you checked this week’s economic calendar, you might’ve noticed it doesn’t even impact major currencies the same way (see Thursday’s and Friday’s CPI reports). In fact, based on its outcome it can produce various degrees of volatility.
Take tomorrow’s CPI – if it remains unchanged (as forecasted) it might not even impact the GBP’s trend. If the result reaches market analysts’ expectations we might even see the same impact as when the report comes out negatively, pushing the GBP in a downtrend.
Only if tomorrows’ Great Britain CPI will come out higher than the 1.7% anticipated, it will have the power to positively impact the Cable’s trend. However, other factors can also contribute to this, so make sure to never throw caution to the wind, and ensure your account’s fully prepared to enter high volatility movements.
Until then, make sure to review our webinars if you want to improve your Money Management or Medium Term Technical Analysis Skills, or make sure to schedule a 1-on-1 with Michalis. If you haven’t checked the Economic Calendar yet, make sure to do it now and see when all the CPI report releases fall this week, for all your favourite currencies.
And dare to trade, only with eXcentral!