Consumer Price Index

The Consumer Price Index (or CPI) measures the change in prices for goods and services. Inflation is the primary focus of the CPI. It is one of the most important economic indicators released every month. The CPI examines more than 200 categories of goods and services. The categories are divided into eight categories, which are weighted in order of importance: Housing, Food, Transportation, Medical Care, Apparel, Recreation, Education, and Miscellaneous.

Inflation is one of the most important factors that affects the supply and demand for a currency. The USD is particularly sensitive to the effects of inflation because so many currencies are linked to it.

Lower inflation and lower interest rates will decrease the demand for the currency, thereby decreasing the value of the currency.

The CPI is released the second or third week of the month at 8:30am ET.

There is generally a lot of publicity leading up to the release of the CPI.

The data released in the CPI will either increase or decrease the demand for the USD.

The USD is very sensitive to the CPI (consumer inflation) figure.

A rising CPI figure means that retail inflation is rising. If inflation is rising, the Federal Reserve Board (the Fed) could raise interest rates to cool down the economy. This interest rates hike makes the USD more attractive to foreign investors. In other words, the demand will increase for the USD, which will increase its price and value.

However, a CPI that is rising too fast could mean that inflation is out of control. Uncontrolled inflation erodes the value of USD-linked currencies because higher prices mean few goods can be purchased.

A lower CPI figure means that inflation is declining, which is not a positive sign for the US economy. Although controlled inflation is desirable, a slowly rising CPI is much more positive than a declining CPI figure.

A declining CPI could signal that the economy is softening (or slowing down). The Federal Reserve could lower interest rates, which would decrease the demand for the USD, thereby lowering its value.

In short, a declining CPI figure would have a bearish effect on the USD.

The CPI figure moves markets! The first peek into the CPI figure comes from the Producer Price Index (PPI), which is the business inflation figure. The PPI is often released just before the release of the CPI figure so Forex traders get some advanced noticed about the inflation situation in the US, which is helpful for planning trades.

Traders should also consider the effect of the CPI on the USD's rival currencies. The Euro tends to move in opposition to the USD after the release of the CPI. The Japanese Yen (JPY) tends to move in the same direction as the USD following the release of the CPI figure.