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Fundamental Forex Foundations

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Consumer Price Index (Core)

Mon, Jul 13 2009, 13:53 GMT
by Tim Salem

FXstreet.com Independent Analyst Team

This Data Point largely measures the Level of Inflation in Goods and Services EXCLUDING Food and Energy within the Economy. The Data is released approximately Mid-Month after The Coverage Month that the Data analyzes. Released at approximately 12:30 GMT, The Data is simultaneously released with the Comprehensive CPI Data Point, which includes Food and Energy.

• Core CPI is one of the most Crucial Data Points each month due to Core Inflationary concerns. Inflation affects the Consumer directly in terms of the actual Costs they are paying for literally everything that is needed and consumed.
• CPI measures the Average Change over Time of Prices paid for a Fixed Basket of Goods and Services.
• Over Time, the CPI provides a “Bellwether” of Comparison for what the Cost of this Fixed Basket is compared with the same Basket under 1 Month, 3 Month, and up to a 1 –Year Period.

Who is Measured and Involved

• The CPI is reflective of the Spending Patterns of two Groups within the population: Urban Wage Earners and Clerical Workers (CPI-W), and All Urban Consumers (CPI-U).
• The CPI-U represents about 87-89% of the U.S. Population, and is based on Urban and Metropolitan Residents including the Self-Employed, Professionals, the Retired, and those that are at or below the calculated Poverty Line.
• This Group does not include the Consumer Patterns of those in Rural, Farm, Military, and Non-Metropolitan Areas, among others.
• With the CPI-W reflective of about 13% of the Population, this Group is largely interwoven into both Sectors. Meaning Metro Areas and Rural/Farm Areas and Occupations.

The Numbers and How They are Derived

In the 1st Three Weeks of each Month, The Bureau of labor Statistics holds Interviews with approximately 23,000 to 25,000 Retailers in 87 Urban Areas.

Current Price Points are then collected on approximately 80,000 Goods and Services.

Each Month, This Fixed Basket of Gods and Services is analyzed so The Bureau of Labor Statistics can obtain a Consensus on how Prices Patterns are behaving Month-over-Month.

The KEY here is this Index EXCLUDES Food and Energy which are highly volatile aspects of The Data each month, and can heavily “skew” the resulting Sentiment.

Traders and Economists see The Core Data as a “pure” Indicator for underlying Inflationary concerns.

The Fixed Basket and How It is Determined

The CPI Fixed Market Basket is largely determined by collected Information concerning detailed Expenditures provided by Families and Individuals based on specific Purchases of Goods and Services.

Current CPI included this Data from the Consumer Expenditure Survey collected over a 3-Year Period prior to the Month and Year being reported.

Within this 3-Year Timeline, approximately 7,000 individuals and Families all over the U.S. provides information on their Spending habits and Cycles through Quarterly Interviews.

In addition, The Comprehensive CPI (including Food and Energy) Information is collected on frequently-consumed and purchased Items such as Personal Care Products and Food through the incorporation of another 5.000 Individuals and Families during each of the 3-Year Period.

A “strict” Purchasing Diary of this Group is then kept for a 2-Week Period of every Good and Service purchased during this time. Comprehensively, about 36,000 to 38,000 Individuals and Families will provide Expenditure Data and Patterns for 200+ Categories of Goods and Services.

The Contents of the Fixed Basket

The Comprehensive CPI represents all Goods and Services purchased by the Two Reference Groups as a Whole (CPI-U and CPI-W). As stated, the moreimportant Core Data Point will exclude the Food and Energy Components, and here are some Examples within each Component.

• Food and Beverages: (Cereal, Chicken, Coffee, Milk, Soda, Alcohol, Frozen Meals such as Banquet and Snack Foods such as Lay’s Potato Chips).
• Housing: (Select Furniture Items, Heating Oil, Primary Residence Rent, Ownership-Equivalent Rent).
• Transportation: (Airline Tickets, New Vehicles, Gasoline, Auto Insurance).
• Apparel: (Men’s and Women’s new clothing, Jewelry).
• Medical: (Hospital Services, Prescription Drugs, Medical Supplies, Eyeglasses/Contacts, Eye Care, Selected Physician Services).
• Education: (Tuition, Telephone/Internet Services, Postal Services, Technology Purchases).
• Recreation: (Televisions, Cable and Satellite TV Services, Cultural Events, Sports Equipment and Services, Pets and Pet Products/Services).
• Other Misc. Services: (Funeral Costs, Personal Grooming Services, Wellness Services).
• Municipal Utilities will also compromise a portion of Services in The Basket such as Water, Sewage, Electricity and Power, Vehicle Registration and Emissions, and other similar Content.

Areas of Use for the CPI (Core and Comprehensive)

As An Economic Indicator: Comprehensive and especially Core CPI is used as the widest Measure of Inflation, and is often viewed as a “Bellwether” of overall Economic Policy. The Index provides Price Fluctuations of the Economy to Government, Labor, Businesses, and Private Citizens as a “Guide” for making Economic Decisions. Most important for Traders is The President, Federal Reserve, and Congress use overall CPI Trends to monitor and adjust Fiscal and Monetary Policies.

As a Currency Deflator: The CPI is also used as a Measure of Health for the underlying Currency as a Deflator in order to find its “Real Purchasing Power”. In case of The U.S., the purchasing power of The Dollar is measured by the “Change” in the quantity of Goods and Services that One Dollar can buy over a period of time on different dates. For Example, as Prices increase, the Purchasing Power of One Dollar will decline with Inflationary Concerns, and Vice- Versa.

As A Currency Adjustment: When Inflation begins to erode the Purchasing Power of the Consumer, The CPI is then used to adjust Consumer Income Payments such as Social Security and other Forms of Social Aid. As a “Cost-of- Living” Wage Adjuster, the CPI is used as a Guide to adjust the Income Eligibility Levels and Wage Increases to many U.S. Workers in various Sectors of the Labor Force.

Trading Ideas

As stated, Traders will keep a Mindful Eye on the CPI Data Point Release, especially Core, as it is such a comprehensive “Bellwether Indicator” of Consumer Data and Sentiment of overall Economic Health.

CURRENCIES: The Inflationary Effects on the underlying Currency will make said Currency ONLY attractive to Foreign Investment if the Economy is in a Cycle of Expansion with Rising Interest Rates. If the Rates are rising rapidly along with Inflation, it will present a negative Effect on the underlying Currency, since each Unit is worth “less” Purchasing Power for the Consumer as a Whole.

BONDS: An unexpected Rise in CPI will cause Bond Prices to deflate and devalue, especially if Core CPI is exceedingly strong. If CPI Data Points emerge “In-Line” with Consensus or indicates slight Inflation, Bond Prices will rise accordingly.

EQUITIES: A deep Increase in CPI Readings, especially the Core CPI, will increase Bond Yields. As mentioned above, this will be negative for Equity Values due to the Bond/Equity Correlation being “Inverse”. Conversely, if CPI Data is relatively “In-Line” with Consensus and Inflationary Concerns are stable; this will increase the Values of the underlying Equities Markets.

Traders may take Cues for working with The Release from the ”Disconnect” between Consensus and the actual reported Data, as well as if the underlying Economy is in a Cycle of Expansion or Contraction. The underlying Currency will respond to this “Disconnect” or “Connect” immediately after The Release.

For Example, in “gauging” Expectation and the Economy is in Expansion overall, then Inflation and Growth will set the stage for that Country’s Central Bank to “control” Inflation by raising Interest Rates.

So, if that is the Climate “seen” during the CPI Release, there is a Probability that the Currency is already Well-Bid, and will be increasingly so with Positive Readings.

Traders will look to observe what the specific Economic Climate is, so they may judge Rates of Change in Inflation prior to the CPI Data Point Release. This will give Insight into where the underlying Currency may go, as an Expansion Cycle will provide more Momentum to see the Currency immediately Appreciate with positive Data, while Contraction and “weaker” Data will see the Currency rapidly deteriorate in The Immediate-Term of Release.

12 Months Percent Change

Series Id: CUUR0000SA0

Not Seasonally Adjusted

Area: U.S. city average

Item: All items

Base Date: 1982-84=100

12 Months Percent Change - CORE

Series Id: CUUR0000SA0L1E

Not Seasonally Adjusted

Area: U.S. city average

Item: All items less food and energy

Base Date: 1982-84=100

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Published on  Mon, Jul 13 2009, 15:11 GMT