Index of prices to the consumer (IPC) has a great influence on Forex trading. As an important economic indicator, CPI affects not only Forex, but also interest rates and prices of bonds and stocks. The IPC is also used to adjust the mechanisms of flow of cash, such as pensions, health insurance and income. As a result, most traders and investors believe that the CPI affects their strategies in a way or another. The CPI compares the domestic cost of a specific basket of goods and services with the cost of the same basket in a previous period.
Economic indicator: how the influences CPI in Forex trading?
The IPC is the reference point important for inflation in the economy. Operators must have their eyes on the CPI. Once investors begin to feel the pressure of inflation, they are required to change their investment strategies and find alternative ways to invest their capital. An investor who gets 20% of its dividends from investments may lose the value of the investment when the setting of currency inflation is 20% or more.
Governments also kept a close eye on the CPI. There are measures that the Central Bank or the Federal Reserve can take to ensure that the CPI remains at acceptable level. The IPC is also used to adjust payments to beneficiaries according to their Social Security and to the retired military or federal service. In addition this economic indicator is used to adjust the income tax structure to prevent the increase of tax-induced inflation. All these actions have a direct impact on the Forex market.
For example in China
Due to the economic boom in recent years, people got the chance to win more money than before. As a result, the purchasing power grew, and prices go up to compensate for the difference. This cycle of increasing wages and purchasing power is intended to send inflation soaring. A CPI report may highlight this trend and encourage the Government to take corrective action.
IPC may also be affected by the growth of the prices of certain products. For example, the increase in oil prices may affect transportation, food, public services, and sale to the retail, which can stretch the working class budgets. In this case the significant growth of the price of a commodity can trigger an effect domino, which would affect investors and operators of Forex market strategies.