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FOREX ECONOMIC INDICATOR:CONSUMER PRICE INDEX (CPI)

Consumer Price Index is a very popular economic indicator that is considered as a tool of measuring inflation and money supply in the economy. According to wikipedia.com "Consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households." And according to the Bureau of Labor Statistics Consumer Price Index is "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."

Source:bulawayo24.com
From the definition of consumer price index, we can easily understand that with the increase of consumer price index the price of consumer goods and services goes up, at the same time the purchase power of consumer goes down. It means, if we could buy a shoe for $5, after 2% increase in CPI we would buy the same shoe for $5.10. CPI is a indicator that is used to measure the inflation and money supply in the economy. 

Generally, the increase in CPI is considered as a bullish sign for a currency, but sometimes it can have bearish effect on the currency. So, both increase and decrease in the CPI can be considered either positive or negative for a currency, considering the economic situation and performance.Increase in CPI should be followed by the improved economic performance, and if increase in CPI is not followed by the improved economic performance then it is called recession. 

In forex trading, traders should know whether the authority to monetary policy considering CPI as a tool of analyzing inflation situation or not. If yes, then for that currency CPI is very important economic indicator. For example, ECB uses CPI to analyze the inflation situation in EuroZone, so CPI is a very important economic indicator for Euro, but the FOMC uses personal consumption expenditure(PCE) to measure the inflation situation in US, so for USD PCE is more important than CPI. 

Core CPI is a method of measuring core inflation in the economy. Core CPI is measured by subtracting the  energy and food prices from CPI. Core CPI is more accurate measure of inflation because it excludes the very volatile energy and food prices.

In bottom line, we can say CPI is an economic indicator that explains the inflation situation. Traders should consider the CPI data to predict the monetary policy decision and outlook.