Tracking Inflation Key Indicators and Price Measurement Strategies
We already covered popular macroeconomic indicators in our last lesson. Now, we’ll talk
about rates that measure price increases, specifically inflation.
Consumer Price Index (CPI): What is it?
Considered the most widely-recognised measure of rising consumer price, the CPI rate
reflects how prices for a variety of goods and services have changed on average over time
for consumers. A common term for the annual change in the CPI is the «inflation rate.» It is
possible to measure this rate quarterly, annually, or monthly. We have already talked about
the importance of inflation and how it affects monetary policy. As a result, the currency is
typically strengthened by an inflation rate that exceeds market expectations, while lower
rates or a drop in prices tend to weaken it.
How is Core CPI different?
The Core CPI does not include the frequently volatile prices of energy and fresh food prices,
like the CPI. The entire CPI can be distorted by variables like OPEC’s manipulation of oil
prices or the effects of the weather on food prices. The Core CPI is frequently used by
analysts and investors to determine the true rate of inflation. A rise in this rate usually
makes the currency stronger, whereas a fall usually makes it weaker.
Understanding Harmonised Index Of Consumer Prices (HICP)
In the Eurozone, the HICP measures consumer price inflation. The euro’s adoption and the
role of the European Central Bank (ECB) resulted in all countries in the EU following the
same methodology, which is what “Harmonised” refers to. Since it facilitates direct
comparisons and helps in evaluating the overall inflationary pressures within the Eurozone,
the HICP is regarded as being superior to the national CPI rates of Eurozone member states.
The common currency is generally supported by a rate that is higher than market
expectations, whereas a lower rate has the opposite effect.
Basics of Core Personal Consumption Expenditure (Core PCE)
The Core PCE price index measures consumer prices excluding food and energy, highlighting
underlying inflation trends in the US. Core PCE and CPI rate are considered the Fed’s preferred
inflation indicators and key metrics for the US economy. An increase beyond market
expectations can support the USD, while a decrease can weaken it.
About Producer Price Index (PPI)
Lastly, instead of measuring price increases for consumers, the PPI does so for producers. It
shows how the average change in selling prices for goods and services received by domestic
producers over time has changed. Businesses that keep raising their prices may eventually
pass those increases on to customers. The currency is generally supported by a PPI rate that
exceeds market expectations. On the other hand, a lower rate or contraction can make it
weaker.
In the upcoming lesson we will examine employment indicators.