Consumer Price Index, now i apologise to more knowledgeable people here, this is a noob question. C-P-I if its been forecast at 1% but then comes up at 1.5% actual, does that mean that prices have risen (i think it does) which means now your money wont buy as many goods as before, so it should make a currency weaker (i think) but it seems to do the opposite. Today the dollar got stronger with higher than expected CPI numbers. can someone quickly explain this to me a noob please, thanks in advance.

Hi! Nice analysis. It probably would have worked if we were under “normal” circumstances.

Nowadays consumer price data is closely watched because of its correlation to the central bank’s policies. Today the higher-than-expected CPI not only signaled that the U.S. economic recovery is gaining momentum, but it also kind of gives the Fed the “go” signal to continue reducing their monthly stimulus.

Less Fed stimulus = less USD in the markets = higher value per USD available.

Hope this helps! :slight_smile:



that in macro-economics a healthy cpi number for any economy is considered to be just over 2% or similar*

*it is not a stand alone economy indicator, its influence is dependant whether it is positive or negative on other factors as well, yet for the circum stances of US economy (plus japan’s and e.u.'s as far as i know) it is good the indicator to appear as a result in a relative math formula with such limit (2% or more).

Yep, it is all in context, UK’s cpi was lower and gbp felt a little push down.

One of the biggest threats to economies at present is deflation. Central Banks fight deflation with two main weapons, lower interest rates and money printing (QE, stimulus package or whatever other fancy term that may be used)

These weapons are intended to ‘stimulate’ the economy by increasing spending, a consequence of increased spending means increased demand, thus higher prices.

Both these weapons have the effect of devaluing a currency, generally because printing ‘dilutes’ and lower interest rates scares off investors.

Obviously if inflation is increasing toward the magic 2% then that lessens the need for Central Banks to use aforesaid weapons, and indeed if inflation heads beyond 2% then increasing int rates is one way of fighting that - investors love interest rates, up goes value of currency.

Tut tut - I hear the economists, impossible to sum it all up in a few sentences - they’ll write whole books saying something similar :slight_smile:

I should maybe add that deflation causes decreased spending by business and consumer alike and can be very difficult to shake off.

Thats great, explains a lot. so the gbp should get stronger at the end of the year when carney raises rates. The usd should also get slightly stronger when the fed stops stimulus, any idea when the fed will do this?

If the Fed increase the rate of stimulus pull out or ‘tapering’ as it’s called then up will go USD, or indeed if they hint at increasing taper or if they are ‘hawkish’ in their tone (man I love these third millennium terms) then the same result.

This is the thing about statements, they are difficult to trade in that hard numbers can be researched beforehand, this time there is an expectation of hawkishness, but then again that’s just commentators’ comments.

Carney has been pushed into his corner by those very numbers, less than a month ago he was singing a tune ‘there is no prospect of a rate increase in the foreseeable future’.
The market ignored his singing, it simply looked at the numbers and came to it’s own conclusion evidenced by the continued buying of GBP.

So for GBP it will be drip drip, down on USD strength, then up on strong UK numbers, on more talk of rate increase and then eventually a .25 increase in the Autumn.