Essential

Inflation

The rate at which prices for goods and services rise over time, eroding purchasing power and driving central bank policy.

Definition

Inflation measures how quickly prices are increasing across an economy. It is one of the most important drivers of forex markets because central banks raise interest rates to combat high inflation and cut rates when inflation is low. Higher interest rates attract foreign capital and strengthen the currency, so inflation data releases (CPI, PCE) are among the most closely watched economic events.

How It Works

Measured by Consumer Price Index (CPI) and Producer Price Index (PPI)
Core inflation excludes volatile food and energy prices for a clearer trend
Most central banks target around 2% annual inflation
Rising inflation leads to tighter monetary policy (rate hikes), supporting the currency
Falling inflation or deflation leads to looser policy (rate cuts), weakening the currency

Trading Tips

CPI releases are high-impact events. Expect sharp moves in the currency and bond markets.

Watch core CPI more than headline CPI. Central banks focus on core inflation for policy decisions.

Compare inflation trends across countries. Diverging inflation paths create forex trends via rate differential expectations.

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