I thought by definition inflation erodes the purchasing power of a nation’s currency. But the economic calendar at ForexPros.com says that a high CPI should be “taken as positive/bullish” for the nation’s currency. Here’s an image I snipped:
Please explain to me how inflation affects currencies.
The primary factor what drives currency values higher against other currencies is interest rates. Rising inflation is usually a key factor that the central bank of that country rises interest rates. Hence the expectation of strenght.
Another reason is probably that higher inflation correlates often with a better economy. Better economy --> Currency gets more strenght as well.
You have to differentiate between exchange rates and purchasing power. Inflation reduces purchasing power, but that doesn’t necessarily mean much for exchange rates because other currencies experience inflation as well. The forex market is about relative currency values against each other.
That is a great question! Basically, when a country’s GDP’s grows, it means that the country is producing more, exporting & importing more and consumers’ buying power is getting higher as well. That leads prices to rise, which is a good thing because it means that the local economy is growing. That is the natural way in which the prices need to rise. However, if prices get higher because of artificial ways, such as money printing or low interest level, then the danger of inflation is real. The reason is that prices are getting higher but the buying power of the consumer is unchanged or even reducing. So high inflation is dangerous for the economy, whereas natural grow of the CPI is OK (though it can lead to bubbles – nothing is perfect).