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Consumer Price Index (CPI) and its effects on the Forex market

Inflation, CPI and its effects on the Forex market. Analyze changes in prices, investments and exchange rates before and after the release of CPI data
Visualizing the impact of buyer shortage in Markets. Economic consequences and shifts in supply and demand equilibrium.
Consumer shortage in Markets

🙋‍♂️Hello dear readers. If you are interested in fundamental analysis, this article is just for you. This type of analysis deals with the field of economics. While discussing the development of countries, the concept of inflation also comes into play alongside the need for economic growth. When we say that the economy needs to grow for states to develop, we come across the concept of inflation.

❓  So what is inflation?

💥Inflation refers to the continuous and significant increase in the general level of prices. This indicates that the prices of goods and services, in general, are consistently rising. Inflation implies that nominal national income is increasing in relation to real national income, meaning that with the same amount of income, less goods or services can be purchased. Significant increases and decreases in price levels are also indicators of inflation. Therefore, inflation is an economic term that generally represents the situation of prices of goods and services continuously rising.

Inflation often emerges as an economic issue with various consequences. One of these consequences is the depreciation of currency and the subsequent decline in purchasing power. During periods of high inflation, prices consistently rise, leading to a reduction in the value of money. Consequently, consumers are able to purchase fewer goods and services. When visually represented, this can be depicted through a graph showing the diminishing value of currency or an indicator related to the currency. Such a visual representation effectively illustrates the impact of inflation, conveying the loss of value and diminishing purchasing power caused by inflation.
Feeling the effects of Inflation

 ❓ What are the main causes of inflation?

Inflation is caused by basic factors such as the inability of the supply of goods and services to keep up with the increase in demand, the increase in the prices of production inputs and the decrease in total supply, and the result of people increasing their prices in advance according to their expectations of future inflation.

 ❓ What are the methods of calculating inflation?

🧮To calculate inflation, two different price indices are primarily used:🏭 the Producer Price Index (PPI) and 🛒the Consumer Price Index (CPI). The PPI measures the changes in prices of goods produced by the producers, while the CPI examines the weighted average changes in prices of goods and services purchased by consumers. To determine the level of inflation, the results of these two indicators, CPI and PPI, are examined, and inflation is calculated. In other words, the calculation methods of inflation rely on the use of CPI and PPI indices, which measure the changes in prices of relevant goods and services.

Turkish Statistical Institute (TÜİK)'s Latest Report: June 2023 CPI Shows Annual Inflation Rate of 38.21% in Turkey.
Consumer Price Index (CPI). Source of image: TUIK

✍In this article, I will try to present information about the Consumer Price Index (CPI) and its effects 📊in the Forex market. The Consumer Price Index (CPI) is a type of index that measures price changes of goods and services purchased by consumers. This index is used as an indicator of inflation reflecting price changes in 🧂goods and 🍴services.

The Consumer Price Index (CPI) provides information about the level of inflation in a country, and the increase⬆ or decrease⬇ in the CPI is directly related to inflation. In the calculation of CPI, essential goods and services are taken into account, while factors with continuously changing prices and not included in the list of basic needs are disregarded. The calculation of CPI is done by considering the share of consumer expenditures in inflation. Increases in CPI rates can often lead to higher interest rates and a strengthening of the currency in the markets. Additionally, CPI signals the possibility of significant price increases. CPI data is typically published and shared with investors in the first two weeks of each month 📅on the economic calendar.

June 2023 CPI in Turkey: Health Witnesses Minimal Monthly Increase, Alcoholic Beverages and Tobacco Exhibit Highest Growth in Main Groups
CPI annual rate of changes in main groups (%) in Turkey. Source of image: TUIK

In addition to CPI, the CPI rate also plays an important role in calculating annual inflation data. CPI holds a significant position among the price index data that reflects 🛒the purchasing power of producers or consumers. It represents an average measure of price changes in a specific group of goods and services, indicating the changes in consumer prices. CPI is a key indicator used in economic analysis to measure price changes. The CPI index starts at 100 based on a chosen base year and increases or decreases in subsequent years based on price changes. 🧮The calculation of CPI demonstrates the impact of price changes on consumer expenditures. Thus, increases or decreases in the CPI index can reflect changes in consumer purchasing power. CPI is an essential tool for making economic decisions, analyzing the effects of inflation, and shaping policies. Businesses, investors, and governments attempt to understand economic trends and predict future inflation expectations by considering CPI data. Regular monitoring of CPI is crucial for ensuring economic stability and 🤜combating inflation.🤺

When CPI data is released, markets are characterized by extreme volatility, sudden price movements, increased volatility and liquidity. If a trader opens a position ⏳during this time, there may be a need for ❌a stop loss. Additionally, CPI data can influence 🏦central banks' monetary policies. Positive or negative CPI data also impacts expectations regarding interest rates, monetary policy, and currency value. When the data is announced, it is necessary to consider these factors when making trades.👀 Let's look at the following examples of market price changes when CPI data is released:

Before the Consumer Price Index (CPI) data is released:

The release of US CPI (Consumer Price Index) and Core CPI data in the economic calendar is garnering widespread attention. These data points are considered crucial indicators to assess the health of the American economy and inflation trends. While CPI reflects the overall rate of price increases for consumers, Core CPI measures the underlying price movement excluding volatile items such as energy and food. Financial markets closely monitor these data releases to evaluate their impact on economic policies, investments, and currency dynamics. Therefore, the upcoming announcement of CPI and Core CPI data holds significant importance in the economic calendar and has the potential to trigger substantial market movements.
US CPI and Core CPI Data Coming Soon in Economic Calendar

Analyzing EUR/USD chart ahead of US CPI and Core CPI Data release.
EUR/USD Chart: US CPI and Core CPI Data Release Impact Awaited

Analyzing XAU/USD Chart ahead of US CPI and Core CPI Data release.
Gold Chart: US CPI and Core CPI Data Release Impact Awaited

After the release of the Consumer Price Index (CPI) data:

In the Economic Calendar, US CPI and Core CPI data were announced below expectations.
US CPI and Core CPI data were announced below expectations.

After US CPI and Core CPI Data Released Below Expectations, Dollar Begins to Depreciate in EUR/USD Pair.
EUR/USD Pair Reacts to Below-Expected US CPI and Core CPI Data

XAU/USD Pair Responds to Below-Expected US CPI and Core CPI Data with a Notable Increase in Gold Prices
Lower-than-expected US CPI and Core CPI data drive Gold prices up.

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