Economic Indicators 101

Hi guys,

I am very new to Forex and I would like to understand how some economic indicators influence the market to go up or down.

Hopefully you could give me some pointers on these indicators… Here’s what I feel about them and I know I could be wrong.

[B]Consumer Price Index[/B]

Signs of inflation means the central bank has to raise interest rates.

If CPI goes down = :slight_smile: Good??
If CPI goes up = :mad: Bad??

Question: Does more inflation and increased interest rates = bad for economy?

Same goes for [B]Producer Price Index[/B].

[B]Personal Income and Spending[/B]

Question: What does an increasing and decreasing personal income and spending mean for an economy?

Concentrate on interest rates to start. This helped me immensely. To be very elementary about it, anything that will cause the market to anticipate higher interest rates will strengthen a currency. Obviously, this is not a complete statement but a good place to start.

As for the dollar, any economic report that will lead the market to believe inflation is a major concern will also cause it to believe that the Fed will not cut rates at worst and raise them at best. This would be dollar positive.

I am new so that is just my understanding to this point. But it is a good topic so I thought I would contribute and let the more knowledgable correct me.

What does an increasing and decreasing personal income and spending mean for an economy?

An increasing personal income usually means consumers have fatter paychecks to use for buying stuff. If personal income is rising, then people have more money to spend on necessities and luxuries. Personal spending confirms whether people are immediately using their money or saving it for purchases in the future. Taken as a whole, the two sets of data give an idea of whether consumers are living within their means.

You have to pay special attention to the directional trend of both. If personal spending is rising faster than personal income then people are buying more stuff than they can actually afford meaning they’re using debt like their credit cards or tapping credit from their home equity. This wouldn’t be a problem is one’s credit supply was unlimited. But it’s not. And once one’s credit runs out, this usually means the shopping stops. Having your country’s consumer spending totally based on debt and not on raises isn’t good in the long term.


Increasing Consumer Price Index and Producer Price Index = Good for economy?

Income > Spending = Good for economy?