Introduction:
The full meaning of CPI is “Consumers Price Index”. It is an economic indicator that have the responsibility of helping businesses, institutions, policymakers, Investors and consumers to understand the tends of inflation and how it will affect their purchasing power. It is used in measuring the changes in expenses or price of goods and services that are been purchased by the consumers.
In this detailed article, I will be explaining everything about CPI including how it’s been calculated, it’s role in stabilizing any country’s economy and worldwide. And how to trade it as a Forex trader and make a good profits.
What is CPI?
The Consumer Price Index is an indicator use to measure the changes in price of goods and commodity that are been purchased and used by households. Central banks and government use CPI to check the level of inflation or deflation in the economy.
The fact that CPI is an economic tool that is used to measure the changes in the price of goods consumed by individual is what makes it the best tool or indicator for checking the purchasing power of individuals within the country.
WHAT ARE THE TYPES OF CPI?
We have different types of CPI, which are categorized to provide a good results of a specific price changes.
- Headline CPI.
Headline CPI shows the overall changes in the price of goods and services.This type of CPI comprises of food, beverages, housing, transport, apparel, medical care, recreation, education etc. Since this components are fluctuating in nature, it marks Headline CPI to be a highly volatile type of CPI.Investors, Policymakers and businesses owners used this CPI to understand the level of inflation affecting their customers and consumers.
2. Core CPI
Core CPI includes different kinds of goods and services, like housing, transportation, communication, education etc, but food and energy is not included. Food and energy are excluded because they are highly volatile and fluctuate due to weather, seasons, events taking place in a goepolitical areas at a particular time.Central banks and Federal Reserve make use of this type of CPI to make a policy or monetory decision, because it indicates a trend of long term inflation
3. CPI for Urban Consumers (CPI-U)
This type of CPI measures the changes in the price of goods and services purchased and consumed by the people staying within the urban region.
This urban consumers can be employed or unemployed individuals, wage earners retirees etc.
This type of CPI is use for analysing and adjusting government benefits in the economy. And it doesn’t have any documentation for price changes within the rural areas.
4. Chained CPI (C-CPI-U)
During period of inflation, price of goods and services tends to go higher, which will make consumers to go for a cheaper alternatives, this changes in consumer’s decision in known as Chained CPI.This type of CPI is used to adjust the cost of living accurately. It also provides a more realistic measures to control inflation.
5. Regional CPIs
The regional CPI measures the level of inflation or increase in price or goods and services within a particular region, like northeast, Midwest, south, and west region within the united states.This type of CPI is use to identify the trends of price of goods and services within a particular region.The regional CPI is use to measure inflation within a particular region, therefore, it will be inaccurate for it to be used in measuring the inflation level of the whole nation.
6. Group-Specific CPI
Group specific CPI is use to measure the changes in price of Goods and services for a specific group of people. These can be retirees, people living within the rural areas, employees, etc.
This CPI is use to analyze the impact of inflation on this special group of people.
WHAT ARE THE IMPORTANCE OF CPI TO THE ECONOMY
- CPI is use by policymakers, investors and businesses owners to measure the level of inflation. They use CPI to know how food and services are increasing at a particular period of time.
- The federal reserve, European Central banks and other central banks use CPI data to formulate the monitory Policy. For instance, these central banks use CPI to determine and adjust interest rate; either by increasing or buying decreasing.
- Data from CPI can also be used to check the need to increase the liquidity circulating within the economy (Quantitative easing) or reducing the liquidity circulating within the economy (Quantitative tightening).
- CPI data can be used decision making, for instance, company can use the CPI data to setup the price tags of their productnin reference to the market conditions. Business owners also use CPI to make budgets and give a better allocation for a particular project.
- Economist and policymakers use CPI to to check the health of the economy; By knowing the changes in the cost of living within a period of time.
- CPI also have some impact on international trades and exchange rates; if the level of CPI is high in a country, the country’s export will become expensive which will reduce it’s competition in the global markets.
HOW CAN A FOREX TRADER TRADE CPI PROFITABLY?
- Firstly, a trader needs to understand how CPI data works on any currency he is trading, to be able to make good trading decisions. When the CPI is more higher than expected, it always strengthens the currency; but if the CPI is to low than expected, it weakens the currency.
- Before the CPI release date, it is very important for the trader to make a good proper analysis, both the technical and fundermental analysis. Check out the previous CPI data and also analysis the charts technically by following the Market trends.
- The CPI have major impact on USD, therefore, it is important to focus on currencies that are paired with the USD.
- Every trader is meant to have a strategy that favours his trading stile, it is important to keep to your strategy rules to have a good entries and exits.
- Lastly, apply a good risk management as forex trading can be volatile and profit cannot be guaranteed.
CONCLUSION:
Consumer Price Index (CPI) is an essential indicator used by central banks, investors and businesses owners to measure the cost of living and the purchasing power of any any currency. CPI is also use to check the level of inflation, economic health and the movement of the market at a particular point in time.
Traders and investors always stay close with the CPI level within a country, in other to make a good trading decisions while navigating through the financial markets.