Microeconomic Indicator in FOREX:
What is Inflation Rate?
The increase in the cost of goods and services over time is known as Inflation. This means you will have to pay more for the same amount of goods and services consumed by you, compared to the previous years. The rate at which the average price of these goods and services increase in any given economy is known as Inflation Rate. It is the per cent increase in the prices during a specified period. Generally, it is over a month or a year. This inflation rate explains how the prices rose during that period. If the inflation rate of a smartphone is 3% a year, that means the cost of the smartphone will be 3% more compared to its price as of today. If a smartphone cost $100 today, its price next year would be around $103.
The rate of inflation is directly proportional to the value of the currency of a country. As the value of currency increases, the rate of inflation decreases. Likewise, if the value of currency decreases, the rate of inflation increases. The buying power of the common people in the country decreases if the inflation rate of that country doesn’t match the rise in the income levels of those people. This means the inflation rate has a direct impact on the cost & standard of living of people residing in a country. The economy of a country gets affected if the inflation rate is abnormally high. If the rate of inflation exceeds over10% hyperinflation is caused, and it could collapse the economy of the country.
How does Inflation Rate effect the economy?
The inflation rate of a country has a strong impact on the currency value of the country. Most of the times the rate of inflation rate will have a significant adverse effect on the currency value and the foreign exchange rate of the country. This means if the inflation rate is very low it won’t do any good to the exchange rates for a country, but if the inflation rates are high, it will directly have a negative impact on the country’s exchange rates with other countries.
Reliable sources of information on ‘Inflation Rate’ for Major currencies:
There is a lot of information with respect to the Inflation Rate in the sources provided below. You can familiarise yourself with the Inflation Rates of the respective country along with the historical data related to that country’s Inflation Rates. You can also compare the Inflation Rates of one country to the other using this web portal. The graphical representation of the historical Inflation Rates data will give you a clear understanding of how the country’s Inflation Rates changed over time. You also get to change the graphical representations according to your preference. A ton of more information related to the latest news in that regard is provided to give you a better understanding.
BP (Sterling) - https://tradingeconomics.com/united-kingdom/inflation-cpi
JPY - https://tradingeconomics.com/japan/inflation-cpi
What do traders care about the Inflation Rate and its impact on the currency?
We know that inflation causes a rise in the prices of goods and services in a country. This means the products are now more expensive than they used to be before. Imports become more expensive for importing countries if the rate of inflation goes up in exporting countries. This most likely results in the cancellation of imports if the inflation rate is extremely high in the exporting country, hence reducing the demand for their goods. Lower demand for goods means a lesser willingness to exchange the export country currencies to import country currency. Lower demand for the currency generally results in the depreciation of that currency’s exchange rate.
Also, when companies pay more for the labour, these higher costs incurred are usually passed on to the end consumers. Consumer prices account for the majority of overall inflation. Inflation is important to the valuation of currency because rising prices result in the central bank increasing interest rates for their inflation containment.
What Central Banks manage the rate of inflation?
Central banks all over the world use different monetary policies to avoid inflation and deflation. The federal reserve system makes sure to control the average inflation rate at 2% per cent with every passing year in The United States. While doing that, the Fed does not consider the energy and food prices as those prices are set by the commodity traders and are extremely volatile to take into consideration while determining and forecasting the inflation rates.
Frequency of the release
The rate of inflation is released every year by the central banks around the world. They are known as annual inflation rates. These inflation rates are also estimated and released month on month. These inflation rates are ever changing and these changes depend on the various number of factors like interest rates etc. There will be a lot of comparisons done on the monthly inflation rates by the central banks to get an understanding of what is causing them and how to control these rates.
The Bottom Line
Inflation is inevitable. Ignorance over the effects of inflation will have an impact on your long term savings. This is one of the biggest mistakes that a lot of investors make. Understanding the unfavourable causes and effects of inflation should be the first step in building long term investment decisions in order to eliminate or at least mitigate the risks involved. Monetary policy does not cause inflation, it cannot stop inflation either. But they strongly and directly affect interest rates which will eventually have an effect on the rate of inflation. So keeping a check on them is always right.