The inflation rate often plays an important role in determining the value of a country’s currency. Learn how the Producer Price Index (PPI) impacts forex.
companies. Released by the Bureau of Labor Statistics, PPI is created using data collected from a mailed survey of retailers selected via a process of systematic sampling of all firms listed with the Unemployment Insurance System.
Traders can see changes in PPI expressed as a percentage change from the previous year, or on a month to month basis.A positive change in the PPI index implies that costs are rising and, in the end, price increases get passed down to consumers. If this effect is large enough, there will be an increase in futureInflation and the effect on the economy
An increase in the general price level is good for an economy but only when this is contained. When demand for goods and services increases, businesses must increase capital expenditure and hire more workers in order to increase their output to meet higher demand. The problem arises when prices increase drastically, resulting in a decrease in the purchasing power of a country’s currency. $1 can buy less than it could one year ago, for example.
In the 1950s, gasoline was $0.27, while apartment rent was $42/month and a movie ticket was $0.48. These figures are nowhere near to where they are today, and this reflects how inflation erodes the value of local currency.
If PPI is on the rise it may cause the interest rates to rise. When interest rates go up, electing to save money looks more attractive as the reward is greater than before. Spending money becomes costlier because consumers would effectively be losing out on the higher interest rate when they choose to spend money instead of saving. As a result, increased PPI may filter down into increased rates and a stronger currency.
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