Traders watch the development of inflation closely, because the method of choice for fighting
inflation is raising the interest rates, and higher interest rates tend to support the local currency. To measure inflation traders use economic tools considered below.
Producer price index (PPI). It’s compiled from most sectors of the economy, such as
manufacturing, mining, and agriculture. The sample used to calculate the index contains about 3400
commodities. The weights used for the calculation of the index for some of the most important groups
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are: food—24 percent; fuel—7 percent; autos—7 percent; and clothing—6 percent. Unlike the CPI, the
PPI does not include imported goods, services, or taxes.
Consumer price index (CPI). Reflects the average change in retail prices for a fixed market basket of goods and services. The CPI data is compiled from a sample of prices for food, shelter, clothing, fuel, transportation, and medical services that people purchase on daily basis. The weights attached for the calculation of the index to the most important groups are: housing—38 percent; food—19 percent;
fuel—8 percent; and autos—7 percent.
The two indexes, PPI and CPI, are instrumental in helping traders measure inflationary activity,
although the Federal Reserve takes the position that the indexes overstate the strength of inflation.
Gross national product implicit deflator. It’s calculated by dividing the current dollar GNP
figure by the constant dollar GNP figure.
Gross domestic product implicit deflator. It’s calculated by dividing the current dollar GDP
figure by the constant dollar GDP figure.
Both the GNP and GDP implicit deflators are released quarterly, along with the respective GNP
and GDP figures. The implicit deflators are generally regarded as the most significant measure of inflation.
Commodity research bureau's (CRB) futures index . The Commodity Research Bureau's Futures Index makes watching for inflationary trends easier. The CRB Index consists of the equally
weighted futures prices of 21 commodities. The components of the CRB Index are:
• Precious metals: gold, silver and platinum
• Industrials: crude oil, heating oil, unleaded gas, lumber, copper, and cotton
• Grains: corn, wheat, soybeans, soy meal, soy oil
• Livestock and meat: cattle, hogs, and pork bellies
• Imports: coffee, cocoa, sugar
• Miscellaneous: orange juice
The preponderance of food commodities makes the CRB Index less reliable in terms of general
inflation. Nevertheless, the index is a popular tool that has proved quite reliable since the late 1980s.
The “Journal of Commerc” industrial price index (JoC). Consists of the prices of 18 industrial materials and supplies processed in the initial stages of manufacturing, building, and energy production. It is more sensitive than other indexes, as it was designed to signal changes in inflation prior to the other price indexes.