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Inflation Reports

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Inflation Reports

Post by Jacq Stone on Fri Oct 28, 2011 9:30 pm

Inflation measures the rate of prices rise in an economy. Inflation has direct relation to the purchasing power of a country within its borders and the country's standing on the international markets. Therefore, gauging inflation is a crucial macroeconomic task. The tool of fighting inflation is raising the interest rates and the higher interest rates tend to support the local currency. The examples of economic data that measures inflation are Producer Price Index (PPI), Consumer Price Index (CPI), Commodity Research Bureau's Index (CRB Index), and so on.

The PPI has been compiled since the beginning of twentieth century. The PPI gauges the average price level for capital, rent and materials required for producers to manufacture their goods. The PPI data is compiled from various sector of economy, such as manufacturing, mining and agriculture. The PPI measures the prices at producer level while the CPI measures the prices from consumer point of view. The sample used to calculate the index contains about 3400 commodities and the weight of each commodity used for calculation is different. This index is released on monthly basis.

The CRB index is made with the purpose of watching for inflationary trends easier. The CRB index consists of the futures prices of 21 commodities. Some examples are gold, silver, lumber, copper, cotton, oil, wheat and so forth. The rising of crucial commodity prices such as oil will start out inflation. When the oil price increases, many other items will increase in price because the production process consumes oil. Consumers and companies have to spend more compare with previous time to buy the same amount of goods. Thus, the rapid rise in oil price initiates inflation and inflation wear down the purchasing power of the particular currency.

The correlation of the crude oil price and the USD/CAD exchange rate is inversely proportional relation as shown in figure 1. Since United States is a highly industrialize country, the demand of crude oil is very high. In addition, Canada supplies most of the crude oil to United States compare to other oil-production countries in the Middle-East due to the shorter distance between the two countries and thus the cost is relatively lower. When the crude oil price increases, it brings large inflation pressure relatively to United States and wear down its purchasing power. High oil prices tend to cut into the US's ability to stay productive. Besides, Canada gained benefits from exporting the expensive crude oil. Therefore, the exchange rate of USD/CAD falls as the Canadian dollar appreciates its value or the US dollar depreciates its value in the situation when the crude oil price rises rapidly.

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