Ever heard of forex PPI, or just PPI?
It stands for Producer Price Index. Does it sound like an indicator?
You know it does.
PPI is an economic indicator.
More precisely, it is an indicator of inflation.
Its more famous, more important cousin, the CPI, steals most of the thunder when it comes to inflation.
However, while CPI IS a confirmation of inflation, PPI is released first.
More on this later in the next section: forex PPI section.
Back to basics.
So PPI tells you about inflation. But what is PPI really?
We mentioned it stands for Producer Price Index.
Basically, statisticians use surveys to compile final goods prices from different industries.
Why ask the producers?
Inflation is the general increase of prices in an economy. We pay attention to the prices of final goods.
And CPI gets that from consumers once shit is done.
But you know who knows prices might go up before they do?
Plain and simple.
If a producer had to buy expend more for x, y, or z reason, they will (in most instances) pass some of that higher cost to consumers as price increases.
So to get an idea of what CPI might end up like, you can ask producers, add their responses to an index an voila! You get PPI, a leading inflation indicator.
Thus, economists, Central Banks, traders, investors and what not, get an idea of what inflation might turn up as through the readings of the Producer Price Index.
There’s really not that much else to say is there?
Now that we know all of this.
How can we trade currencies around such a release?
After all, forex PPI is just a reference to how fx traders can go about trading this data release.
A good example is the strategy of trading into an event.
For example, if the Bank of England says it might consider hiking interest rates if it sees stronger inflation…
And you see analysts’ expectations for CPI to be in-line with high inflation…
You might first wait for PPI to be released before going long the currency (in this case GBP).
As such, a strong PPI might be a confirmation, or strong nudge towards higher inflation in the UK, and thus, both the Central Bank and the market will pay attention to it.
Using the results of the Producer Price index as an important point in your decision making process can yield you some nice pips!
Not to say you can’t trade around forex PPI itself.
I mean, sometimes that is the most decisive release.
For example, if in the previous example, the markets were overwhelmingly expecting a rate hike by the time CPI was to be released, then PPI might have been the biggest pip mover in the rally.
Either way, knowing what’s up will help you much.
As a big wrapping-up caveat, it’s important to know that not all industries or producers pass on cost increases to consumers in the same fashion.
In economics, we say this depends on the price-elasticity of demand.
DAFUQ does that mean?
If the producer increases price, how many fewer units will people buy?
Conversely, if the producer reduces price, how many more units will people buy?
To answer this, economists came up with the concept of price-elasticity of demand. Which is essentially a number which answers that question.
For our purposes though, all you need to know is some goods and services are more elastic than others (people stop buying if price goes up).
While other products and services are what we call “inelastic” (even if price moves up significantly, demand will not plummet in the same fashion).
You can’t stop buying gas for your car. You gotta go to work.
Or at least, gas prices will have to surge significantly before you actually consider taking public transportation (if its cumbersome in your area).
What about candy?
Or that pair of brand shoes?
Maybe you can wait a bit to buy them.
Perhaps, you can live without them.
Ok, so why did I bring this up?
Because a gas producer will be able to increase prices more without losing revenue.
While a candy maker might not have as much luck.
Thus, PPI will be most useful for predicting inflation in industries where demand is most elastic.
Luckily for you, there are tons of PPI indexes based on different industries and what not.
But even more luckily, you will be able to get the headline PPI numbers from reputable forex sources on the web, as soon as they are released.
And it is these numbers that mostly matter to fx markets, not the pinpoint PPI ones.
As such if forex PPI is in your future, try to stick with the headline numbers posted by forex-centric pages, don’t try sourcing the data yourself or you might get the wrong number-easy.
Finally, another reason I went over that was so you know wtf is up with forex PPI.
There are times where the markets aren’t as interested in the headline numbers as they are in a more specific reading of a data release or index.
Thus, knowing just a bit more about the indicator might prepare you well for such occasions.
See you soon,
The Forex Economist
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