Market Impact: High

Consumer Price index has high relevance due to the amount of inflationary pressure it applies to consumer’s buying power. When the price of goods in this basket rises, it erodes the value of the local currency. People would start to feel that extra percentage of loss from their income because of the price hike. As a result, they would either cut back on spending which reduces the total demand for their currency or, they would just demand for higher wages which clearly paves the way for inflation.

For example, the US dollar which has a higher inflationary pressure reflected by the CPI report is traded with the Euro which has posted a lower CPI. It is clear that the US Dollar’s value has eroded more than that of the Euro in terms of how much good a single unit of their currency could buy. With this in the picture, we can also say that a single unit of Euro has got more value than a single unit of a Dollar, therefore, the Euro should be able to buy more US Dollars. (1 Euro = $1.10 USD)

There is another price index which has equal relevance with the CPI, it is the personal consumption expenditure (PCE) which the Federal Reserve favors more than the CPI because the items in the PCE basket changes more frequently.


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