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Markets Explained

What is inflation?

Inflation is generally defined as the rise in consumer prices in an economy over a certain period of time. It can be measured in a number of ways, such as core inflation which leaves out changes in food and energy sector. Or alternatively, as headline inflation which takes everything into consideration.
It’s important to note that increases in consumer prices are measured using the same groups and articles of goods to ensure data comparability. In the USA for instance, Consumer Price Index data collector might measure the price of Kellogg’s Froot Loops, or Coca Cola Zero. The particular items are chosen based on their popularity with the consumers. In the States, these articles are replaced after 4 years for rotation purposes as some new items may have gained popularity. Consumer Price Index measures changes in prices for 8 major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services) that in turn are allocated into more than 200 sub-groups.

What does higher inflation mean?

Higher inflation means that consumer prices have grown compared to the previous period. Increase in prices means that the same consumers want higher salary in order to meet their living costs. This transpires a cycle whereby a dollar is worth less tomorrow than it is worth today since consumers are able to buy less with the same dollar. The loss in value echoes through currency markets – countries with high inflation generally see their currencies depreciate in value. This is the reason why market analysts keep a close eye on inflation expectations and announcements. Higher or lower than expected moves in inflation tend of have an effect on FX prices. Also, all central banks monitor inflation numbers very closely, and adjust their interest rate policy accordingly, to ensure that high inflation levels are muted early on in order to avoid damage to the economy and consumers through rapidly increasing prices
.We will continue to keep you up to date on all inflation rate updates and announcements through our Primus Weekly reports.


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