(2) Consumption index
Consumer price index (CPI) is a measure of the price of a fixed basket of consumer goods, which mainly reflects the price changes of goods and services paid by consumers. It is also a tool to measure the level of inflation, expressed as a percentage change. In the United States, the main commodities that constitute this indicator are divided into seven categories, including: food, wine and beverages; Domicile; Clothing; Transportation; Medicine; Medical and health care; Entertainment; Other goods and services. In the United States, the consumer price index is released by the Bureau of Labor Statistics every month, and there are two different consumer price indexes. The first is the consumer price index, or CPW for short. The second is the consumer price index (CPIU) of urban consumers.
The CPI price index is very important and enlightening, so we must grasp it carefully, because sometimes it is announced that the index is rising, the currency exchange rate is improving, and sometimes it is the opposite. Because the level of the consumer price index shows the purchasing power of consumers and also reflects the prosperity of the economy, if the index drops, it reflects the recession of the economy, which is bound to be unfavorable to the trend of the currency exchange rate. But if the consumer price index rises, will the exchange rate be favorable? Not necessarily, it depends on the "increase" of the consumer price index. Too much increase in the index will have a bad effect, because the price index is inversely proportional to purchasing power. The more expensive the price, the lower the purchasing power of the currency, which is bound to be unfavorable to the country's currency.
If the impact on interest rate is considered, the impact of this indicator on foreign exchange rate is more complicated. When a country's consumer price index rises, that is, its currency purchasing power weakens, according to the purchasing power parity theory, its currency should weaken. On the contrary, when a country's consumer price index drops, it shows that the country's inflation drops, that is, the purchasing power of money rises. According to the purchasing power parity theory, the country's currency should appreciate. However, because all countries take controlling inflation as their primary task, rising inflation also brings opportunities for rising interest rates, which is beneficial to the currency. When inflation is controlled and interest rates tend to fall, this will weaken the currency in the region. The policy of reducing inflation will lead to the "tequila effect", which is a common phenomenon in Latin American countries.
And producer price index PPI.
Producer price index (PPI) is a price index to measure the goods that manufacturers and farmers want to sell in stores. It mainly reflects the price changes of means of production and is used to measure the cost price changes of various commodities at different production stages. The general statistics department will collect the quotation information of various products from major manufacturers, and then convert them into hundreds by weight for comparison. This index is released once a month by the Ministry of Labor, which has a great influence on the price level in the future (usually three months later) and also indicates the overall price trend in the future.
Therefore, producer price index is the leading index of inflation. When the price of raw materials and semi-finished products rises, it will be reflected in the price of consumer goods in a few months, leading to an increase in the overall price level and an increase in inflation. On the contrary, when the index drops, that is, the prices of means of production tend to fall in the production process, it will also affect the overall price level and weaken the pressure of inflation. However, because the data fails to include some commercial discounts, it cannot fully reflect the real price increase rate, which sometimes leads to exaggerated effects. In addition, because agricultural products change with seasons and energy prices change periodically, which has a great impact on the price index, it is necessary to sort out or eliminate food and energy prices before making an analysis.
In the foreign exchange market, traders are very concerned about this indicator. If the producer price index is higher than expected, there is a possibility of inflation, and the central bank may implement a tight monetary policy, which will have a good impact on the country's currency. If the producer price index drops, it will have the opposite effect.