Inflation Indicators

The reason that inflation indicators are such a big deal in the forex market is because traders watch them very closely since one of the ways to fight inflation is by raising interest rates. When interest rates are higher, it tends to support the local currency. Usually, there are nine different economic tools that traders use as inflation indicators:

  • Producer Price Index (PPI)
  • Purchasing Managers' Index (PMI)
  • Consumer Price Index (CPI)
  • Employment Cost Index (ECI)
  • GNP Deflator
  • GDP Deflator
  • Durable Goods
  • Commodity Research Bureau's Index (CRB index)
  • Journal of Commerce Industrial Price Index (JoC index)

Producer Price Index

The Producer Price Index has been being used since the early twentieth century and up until 1978 it was called the wholesale price index. It measures the average changes in prices received by domestic producers for their output at all stages of processing. The PPI includes sections such as manufacturing, mining and agriculture, which is different than the CPI that includes imported goods, services and taxes. The Producer Price Index calculation involves almost 3,400 commodities.

Purchasing Managers' Index

A monthly composite index of national manufacturing conditions is released by the Institute for Supply Management, which is put together from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders and import orders. The index is divided into two subcategories; manufacturing and nonmanufacturing.

Consumer Price Index

The Consumer Price Index measures the average change in retail prices in a fixed market of goods and services. It is put together from a sample of prices for food, shelter, clothing, fuel, transportation and medical services that people buy on an everyday basis. Both the CPI and the PPI are a huge help to traders for determining whether or not the economy is in an inflationary state.

GNP Deflator

There are actually several GNP deflators throughout the market, however, the most commonly used is called the implicit deflator. This deflator is calculated by dividing the current dollar GNP figure by the constant-dollar GNP figure. The reason that deflators are used is because the GNP figure by itself is not helpful to forex traders, so it must be deflated by some price index.

GDP Deflator

Just like the GNP, the GDP is only helpful for traders by being deflated with a price index. The GDP implicit deflator is released quarterly, just like the GNP. For most traders, the implicit deflators are generally considered the most significant measure of inflation in the throughout the market.

Durable Goods

A durable good is defined as a good that lasts an extended period of time (more than 3 years) during which its services are extended. These goods orders measure new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods.

Commodity Research Bureau's Future Index

The Commodity Research Bureau index consists of equally weighted futures prices of 21 commodities. The main components of the CRB index include the following:

  • Grains: corn, wheat, soybeans, soy meal and soy oil
  • Precious Metals: gold, silver and platinum
  • Livestock and Meat: cattle, hops and pork bellies
  • Industrials: crude oil, heating oil, unleaded gas, lumber, copper and cotton
  • Imports: coffee, cocoa and sugar
  • Miscellaneous: orange juice

Journal of Commerce Industrial Price Index

The Journal of Commerce index consists of the prices of 18 industrial materials and supplies processed in the initial stages of manufacturing, building and energy production. This price index is designed for the purpose of signaling changes in inflation prior to other price indexes.