Chapter 6 – Fundamental News 101 (Part I)

NEWS – INFLATION

Since Inflation is the single most important factor that affects Interest rates. News releases that measure inflation are particularly important for the Forex Market.

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Let me refresh your memory, Fundamental trading is speculative trading. Traders place their trades based on what they thing the currency is going to be, not where the currency is right now. Therefore, when we get a higher reading on inflation news releases, market will tend to trade up the currency pair based on the release number.

The single most important news release for inflation is:

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CPI – Consumer Price Index – is defined as a statistical estimate of the government of the prices of goods and services bought for consumption purposes by households. Its computation uses price data collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times and estimates of the shares of the different expenditures in the total covered by the index which are usually based upon expenditure data obtained for sampled periods from a sample of households (wikipedia). It is also known as the “True Cost of Living”.

In short, CPI is what the economists call the Inflation number. CPI usually has a Core number and a Headline number. The headline CPI number, or just CPI, is a complete inflation number that includes everything. The Core CPI number is the inflation number that excludes food and energy (gas) cost, which shows a clearer view on inflation, since energy and food cost may vary depending on season.

Another important Inflation news release is:

PPI – Producer Price Index – (we are interested in the Input component) measures the rate of inflation (i.e., the rate of price changes) experienced by manufacturers when purchasing goods and services. A rising trend has a positive effect on the nation’s currency. When manufactures pay more for goods and services, they are likely to pass the higher costs to the consumer, so PPI is thought to be a leading indicator of consumer inflation. PPI is highly regarded, and at extremes will have a market impact equal to that of its CPI counterpart.

Most PPI news releases aren’t classified as high-impact news. But as stated above, in extreme cases, a high PPI input will affect CPI as a whole, since if it costs more to produce a particular product or service, the provider will have no choice but to eventually pass on the cost to the consumer. PPI numbers are usually released before the monthly CPI numbers, therefore if we get a particularly high PPI input; it makes sense to expect a higher CPI release numbers as well.

HIGHER PPI = HIGHER CPI = HIGHER INFLATION = HIGHER INTEREST RATE
             
       

OR

   
             
LOWER PPI = LOWER CPI = LOWER INFLATION = LOWER INTEREST RATE

 

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About Kelvin Ching

I'm a professional Forex trader and I have been trading for over 7 years. I was a series 3 broker and a registered CTA with the NFA, the main regulatory agency in the United States, and I have been involved at the highest levels in commodity trading. I also have a background in Information Technology, graphics design, and programming... I'm the co-founder of CurrencyNewsTrading.com, a site dedicated to fundamental analysis and news trading.

Comments

  1. uwah prince ozioma says:

    will love to get more understanding on what mr wayne is saying, that’s exactly my question.thanks

  2. mr wayne says:

    if we have a better economy, we will have a higher inflation, a higher interest rate will follow, and higher currency value will be perceived.

    I dont understand this part , don’t we have bad economy is we got high inflation ??

    Also , if there is high inflation , meaning the value of the money in that country is depreciating , in order to bring the balance back , why would the interest rate be increase ? If interest rate increased means is more expensive to borrow money from the bank .

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