Consumer Price Index

One important economic indicator to pay attention to for successful forex trading is the Consumer Price Index (CPI). Also called the Retail Price Index, it is an index that measures the variations in price of a hypothetical determined amount of goods and services representing those purchased by the average consumer.

In other words, it’s an educated projection of retail sales. Such goods include food, clothing, housing, energy, transportation, medical care, entertainment and education. It's also referred to as the “cost-of-living index.”

The purpose of the Consumer Price Index is to measure inflation as experienced by the average consumer each day.

Consumer Price Index and Inflation

The CPI is the most common indicator of inflation. When inflation occurs, it indicates that the central bank will need to raise interest rates. The raise in CPI lets businesses know that future prices for their goods will be rising and informs employers how much money they should be paying their employees for salary. The Fed uses this data to decide whether it needs to intervene in the market and how much action should be taken.

For forex trading, this index is crucial to predicting how a currency will act and whether it is wise to sell or buy it. A successful forex broker or trader will know how to use the data provided to move currency through their forex trading platform.

Carefully designed, the CPI calculates its result through an efficient series of equations. For example, the CPI takes into consideration how often an item is purchased in determining its importance, so that items like food or gas are more valuable than toilet paper and concert and sports tickets.

The data for this index is collected by the Bureau of Labor Statistics (BLS), whose members contact thousands of retailers to obtain information prices of goods provided by those businesses. Each month, 80,000 goods are observed and their prices cataloged for change.

Then, quality specialists make sure that current items are not better or worse than similar previously recorded items, such as shirts made out of a different material or a box of cookies with a different quantity. All of this information is accounted for when creating the CPI.

FX Trading Indicator

Each month, around the second or third week, the previous month’s CPI numbers are released through the Bureau of Labor Statistics, Department of Labor. It is very important when FX trading to stay current on this issue because it can have critical implications for currency values. Most forex brokers consider this one of the best resources available for properly predicting the forex trading market because it even influences the Federal Reserve and retailers. That sort of influence cannot be ignored if successful forex trading is the goal.

Intelligent FX trading encourages understanding what the numbers indicate, rather than simply noting if they are raising or falling. A 1-2% annual increase is typically appropriate for the CPI, but anything higher could mean that heavy inflation is taking place and interest rates or greater short term loans could occur. Year-to-year shifts are the best numbers for forex brokers to pay attention to, because they definitively display inflation data.

The “core rate” needs to be closely observed as it is a better indication of rising prices by excluding food and energy prices which frequently change. Taking advantage of the Consumer Price Index will allow for investors to be successful with their forex trading platform.

Head back to our main resources page for more basic forex trading information. You’ll find info on additional related forex trading economic indicators such as the Core PCE Price Index, the Retail Sales Report and the Business Inventory Report.