The consumer price index (CPI) effectively measures fluctuations in value for a certain group of goods and services purchased by households. In the US, the CPI measures this against the US dollar and the currency’s value.
There are two main categories that come under CPI: core CPI and non-core CPI. The difference between the two, is that food and fuel prices are excluded from the former, the core CPI. The core CPI also typically tends to be more important in the eyes of investors and traders. This is because both food prices and fuel prices can fluctuate significantly each month and so, it is more effective when using CPI for fundamental analysis, to exclude these prices.
The consumer price index is important because it allows traders and investors to keep up-to-date with the level of inflation in the US economy and inflation in the US is obviously going to affect the US dollar and its value. If prices go up in the US so does US inflation: that’ll mean you’re going to get less “bang for your buck”, leading to the value of the US dollar decreasing. In Forex trading, inflation is essentially the cost of holding a currency. Inflation means that you lose money due to gradually growing prices in an economy as mentioned before. So, traders and investors look primarily to trade and invest in currencies with low inflation rates and preferably with higher interest rates. With low inflation rates and high interest rates, a trader or investor loses the least amount of money and gains the most amount of money, quite simply.
The CPI is typically published each month at around the end of each month. The data released is for the previous month. The consumer price index is a lagging indicator, however it still remains important to traders and investors when conducting fundamental analysis – the CPI can be very useful.
In conclusion, the consumer price index is split into two different categories: core CPI and non-core CPI. The core CPI is more important to traders and investors as it excludes volatile food and fuel prices. In the US, the CPI serves to keep traders and investors up-to-date with the US economy’s inflation rate. This helps us all to determine whether or not it is worth either buying or selling USD. Though it is important to remember that inflation as well as interest rates are only blips on the radar for many traders and investors, especially for those who only trade or invest in the short-run. But, when trading in the long-run, it does all add up. For e.g. if the inflation rate is 4% and someone holds $1 million, they will lose 4% of that due to inflation, which is a loss of $40,000 excluding interest made. As mentioned before already, the CPI is published every month of the year towards the end of each month – the CPI released represents the previous month’s data. Finally, the CPI is important to all traders and investors and is a necessary part of fundamental analysis.