Inflation measures the rate at which prices for goods and services increase over time. It’s one of the most important economic indicators for forex traders.
How It’s Measured
- CPI (Consumer Price Index) — Most common measure
- Core CPI — Excludes food and energy (more stable)
- PPI (Producer Price Index) — Wholesale level
Inflation & Currency Impact
| Scenario | Central Bank Response | Currency Effect |
|---|---|---|
| High inflation | Raise interest rates | 📈 Bullish |
| Low inflation | Cut interest rates | 📉 Bearish |
| Target (~2%) | Hold steady | ➡️ Neutral |
Why Traders Care
- CPI releases cause major volatility
- Higher inflation → Higher interest rates → Stronger currency (usually)
- Unexpected inflation data moves markets most
- Central banks target ~2% inflation
Historical Examples
- 2022: US CPI hit 9.1% → Fed aggressive rate hikes → Strong USD
- 2023-2024: Falling inflation → Rate cut expectations → USD weakness