What is Inflation in Forex?
Inflation
Forex Trading Glossary
Quick Answer: Inflation is the rate prices increase over time, measured by CPI. Moderate inflation (2%) is healthy. High inflation weakens currency as central banks raise rates to control it.
What is Inflation?
Inflation measures how quickly the general price level of goods and services rises over time. Moderate inflation accompanies healthy growth, while runaway inflation erodes purchasing power.
How Traders Track Inflation
- Headline data: Indicators like CPI and PPI show broad price trends.
- Core measures: Removing food and energy helps traders judge the underlying trend.
- Market gauges: Inflation swaps and breakeven rates reveal investor expectations.
Policy Consequences
Persistently high inflation pressures central banks to tighten. Falling inflation gives them room to pause or cut. Currencies respond as traders reprice the policy path.
Trading Implications
- Map inflation surprises against currency reactions to understand sensitivity.
- Pair strong inflation currencies with weak inflation counterparts to exploit rate divergence.
- Adjust position size ahead of high impact inflation releases.
- Combine inflation trends with growth data to form a complete macro picture.
Related Terms
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