On Consumer Price Index and producer Price Index

There are two indicators of inflation in economics, namely, the Consumer Price Index (CPI) and the producer Price Index (PPI). CPI measures the total value of goods and services purchased by consumers over a particular period, while PPI measures inflation from the perspective of producers.

Fluctuations in commodity prices affect every consumer, whether you are buying ordinary goods such as milk and eggs, or large items that are sensitive to interest rates. As a result, inflation-related data are one of the few that directly affect the cost of daily living, unlike other economic indicators such as the purchasing managers' index (PMI), consumer confidence surveys and even gross domestic product (GDP).

Both PPI and CPI are seen as key data releases, meaning traders keep a close eye on such monthly indicators, based on which the Fed assesses the economy.

The Fed is a central bank with a dual mandate, which means it is under considerable pressure to strike a balance between inflation and the job market. As a result, any unexpected fluctuations in these leading economic indicators are often cited by Fed members in speeches or public events to manage market expectations.

Because PPI measures the production cost of consumer products, and the prices of goods and food directly affect retail prices, PPI is regarded as an ideal early warning indicator of inflationary pressures.

Using CPI and PPI for transaction

Although the content of the report is complex, traders can be prepared in many ways. Using information from various consumer confidence reports and PMI reports, you can assess the price movements faced by consumers and producers over the past month.

The retail sales report is seen as another important inflation warning indicator, and focusing on energy prices and the overall outlook for commodities through the report will also help traders prepare for the release of data. If commodity prices fluctuate sharply, the market is likely to focus on PPI core data as the most reliable statistics.

Adjust interest rates according to CPI and PPI

As a general principle, the Federal Open Market Committee (FOMC) implements monetary policy, keeping medium-term inflation at around 2 per cent. If the PPI or CPI data are higher than that level, the Fed will think it is bad for the economy. This will cause the Federal Open Market Committee to raise interest rates to curb price rises. On the other hand, if there is a long period of low or negative inflation, the central bank will consider measures to stimulate the economy, such as interest rate cuts or quantitative easing (QE).

Conclusion

There are many factors to consider when trading with CPI and PPI data, but traders can find many opportunities as long as they are well prepared and have some insight.

Source of course: CME