Hint Newsletter #1 - June06, 2023 - CPI

Welcome to the Signals Newsletter!

We are delighted to share with you the latest updates and information regarding the economic calendar. One important aspect to consider is inflation, which refers to the increase in the overall price level and decrease in the purchasing power of a given currency used by consumers to purchase goods and services. The Consumer Price Index (CPI) is commonly used to measure inflation, and the annual inflation rate is expressed as the increase in the CPI over the same month of the previous year.

The CPI is calculated as the average of the price changes of individual items in the consumer basket. The composition of the consumer basket is predetermined and individual items have different weights, which may change at certain intervals. Different countries also have different weights for the different categories that make up the consumption basket, from which inflation is calculated.

Looking at the U.S. as an example, the chart above shows the annual percentage change in the stock market versus the annual percentage change in consumer prices. We can see that when consumer price inflation is accelerating, it has often coincided with periods of stock market declines, not advances.

Inflation is a crucial economic indicator as it provides insight into a country's monetary policy and how it may evolve. Higher inflation, as many economies are experiencing in mid-2022, can lead to central banks raising interest rates. This can have a dampening effect on economic activity, but can also make the currency more attractive to investors. However, high inflation may not always lead to higher interest rates and traders should consider this when assessing the potential for currency appreciation. From the chart above you can see that when CPI is high, the stock market tends to decline and inversely when CPI is low, the stock market tends to rise

Most countries release information on inflation on a monthly basis, with some exceptions such as Australia and New Zealand which release data quarterly and Europe, where the ECB releases Eurozone inflation data twice a month. In addition to the CPI, other indicators such as the Core CPI, PPI, and PCE index are also closely monitored.

Traders should exercise caution when inflation data is announced and avoid making trades until the data is reported to avoid increased volatility and spread widening in the currency markets. This can particularly be the case when published data differs significantly from analysts' expectations.