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Newbie question about economic indicator

  • #1
  • First Post: Apr 11, 2012 7:05am Apr 11, 2012 7:05am
Take this, number today comes out in less than half an hour.

Description from forexfactory.com:

"Import Prices m/mMeasures Change in the price of imported goods and services purchased domestically;
Usual Effect Actual > Forecast = Good for currency;

FF Notes This is the earliest government-released inflation data"


My question: Why is higher inflation in the US good for the USD? If the "federal" reserve prints dollars that debases the USD and causes inflation. So inflation is caused in part by a depreciating USD. Why would higher inflation cause the USD to appreciate?
  • #2
  • Apr 11, 2012 12:07pm Apr 11, 2012 12:07pm
Quoting dice action
Take this, number today comes out in less than half an hour.

Description from forexfactory.com:

"Import Prices m/mMeasures Change in the price of imported goods and services purchased domestically;
Usual Effect Actual > Forecast = Good for currency;

FF Notes This is the earliest government-released inflation data"


My question: Why is higher inflation in the US good for the USD? If the "federal" reserve prints dollars that debases the USD and causes inflation. So inflation is caused in part by a depreciating USD. Why would higher...
Regarding the news, it is an indicator of economic activity to come, the more expensive it is to buy imported goods and services, the higher the incentive is to buy domestically made goods and services as they become more cost attractive, thus generating business for USA companies which then create or keep USA jobs, also a lower USD means USA exports of goods and services become more cost attractive to foreign buyers thus generating more business for USA.

This incentivized activity towards the domestic economy is the result of a falling currency value. Inflation has large affects on the pricing of goods and services and reallocates domestic investment, and also results in the falling value of the currency to foreign investment - and that's what matters most when dealing with international economic relations. It's one of the reasons China can keep it's currency artificially devalued and simultaneously have very strong economic growth. Hope that answers your question.
  • #3
  • Apr 11, 2012 12:17pm Apr 11, 2012 12:17pm
Quoting jeanlouie
Regarding the news, it is an indicator of economic activity to come, the more expensive it is to buy imported goods and services, the higher the incentive is to buy domestically made goods and services as they become more cost attractive, thus generating business for USA companies which then create or keep USA jobs, also a lower USD means USA exports of goods and services become more cost attractive to foreign buyers thus generating more business for USA.

This incentivized activity towards the domestic economy is the result of a falling currency...
What it said was that inflation causes currency to appreciate (not depreciate), I find your last paragraph suggesting the opposite?
  • #4
  • Apr 11, 2012 12:36pm Apr 11, 2012 12:36pm
In easier term, inflation in normal range will lead the Fed to increase rate thereby attracting inflow of investment to US, in the end that can affecting USD value to increase.

But in real condition it is a bit complicated, because the talk about inflation can not be separated from Government financial decision & market perception which digest it. Inflation is a condition of perspective from people whose thinking that current condition is easier to earn money in good economic condition. In business, that view translated to adjustment of good's price, if people think it is easier to earn money & economic condition is quite good, so it means good's price ought to rise.

From above description we can tell inflation is not a function of money supply, but more likely a function of market perception. The phase of easing economy surely connected to larger part of USD circulate into market, but if market feels the future of US is bad there's still no increase of inflation because good's seller still cautious about purchase power of people, if they rise the good's price there are no one afford to buy. Inflation happens when people positive perception collide with easier term to earn money.

So, in normal condition, rise of inflation rate is a sign of positive perception of market, it's a sign of economic rolling good. When condition of economic is good, investor will flowing in to US, and when it happens The Fed will welcome it by rising the interest rate. Rising of interest rate will drive more investor to buy treasury so does the circle goes rolling up pulling USD exchange rate.
  • #5
  • Edited 2:05pm Apr 11, 2012 2:01pm | Edited 2:05pm
Quoting dice action
What it said was that inflation causes currency to appreciate (not depreciate), I find your last paragraph suggesting the opposite?
Oh right you are I got carried away, a little bit of inflation is fine, it means that businesses are taking loans and the economy is growing, and with an increased monetary base the fed or individual banks can offer higher interest rates to attract foreign investment. Now a devalued currency in the eyes of foreign investment means cheap currency - 'momentary' set back and buying opportunity, with security of the investment based on the increased domestic economic growth it is presumed to create that goes hand in hand with a bit of inflation. Expensive imports incentivizes domestic production. Now the signal for an effect like this would be something like the price of imports, that would force this effect to continue reinforcing the attraction by foreign investment.

If you look at the EURUSD month chart, you'll see it's been falling recently, so 1 euro buys less and less usa dollar, ie the dollar has been strengthening.
  • #6
  • Apr 12, 2012 1:46am Apr 12, 2012 1:46am
hm, okay, this is only my perception, I don't know what I'm talking about:

Inflation that is caused by the Fed printing money, should not be dollar positive, because printing money is dollar negative...

However, inflation as a result of something else is dollar positive first and foremost because it signals a rate hike in the future, which would be dollar positive.

But I don't see how inflation in itself would be purely a signal that the economy is going well. The usd should not be rising if there is hyper-inflation (unless you think hyper-inflation would cause the Fed to hike rates), as that would mean the country's economy is *not* doing well.

Or maybe I'm just confused.
  • #7
  • Apr 12, 2012 2:23am Apr 12, 2012 2:23am
Well there's two types of inflation - regular at 1-5% per annum and hyper inflation, one is expected and not worrying (look at a historical chart of US inflation for the last century) and the other is economically terrible (Germany, Argentina and Zimbabwe). I think you probably have a lot of negative thoughts from Austrian economics about the Fed and inflation, fact is every country has inflation, as long as new loans with interest are made my banks and used by business, the money supply will increase, and as long as the economic atmosphere seems to be fine, businesses will keeping taking loans to generate product and service value and pay wages on the premise that demand is stable. Since the Fed was established recessions have been shorter, their role in 'printing money' is to increase the credit availability that banks can loan with, to businesses, that 'hopefully' create value and pay wages with while keeping interest rates steady, keeping the economy going.

Inflation itself, depending on the amount is not a problem, what matters is now much value is generated in tradeable products and services, if there is sufficient value then the currency may not weaken because it will be supported by goods and services being sold. If there is inflation with no growth in value then that's bad.

The situation you have in your first post is inflation hovering under 5%, with no growth leads to devalued currency, so if the price of imports rises, that will incentivize domestic growth and will strengthen the currency on the presumption that the growth in tradeable goods and services in fact will come.
  • #8
  • Last Post: Apr 12, 2012 2:34am Apr 12, 2012 2:34am
Quoting dice action
hm, okay, this is only my perception, I don't know what I'm talking about:

Inflation that is caused by the Fed printing money, should not be dollar positive, because printing money is dollar negative...
As I described before, inflation is not a function of money supply, therefore even The Fed flooding market with QE1, QE2, QE3 and so on, you name it, it's not the source of inflation. Money supply is just the raw material for inflation, the real trigger is domestic perception about economic condition underlying it. If market expectation of US future is negative, there will be no inflation even if so much USD flooding around.

Quoting dice action
But I don't see how inflation in itself would be purely a signal that the economy is going well. The usd should not be rising if there is hyper-inflation (unless you think hyper-inflation would cause the Fed to hike rates), as that would mean the country's economy is *not* doing well.

Or maybe I'm just confused.
Yes, inflation is not a divine signal of "economy going well", if inflation goes hand in hand with domestic purchasing power & can be controlled at a certain degree it's a good sign, but if you are talking about hyper inflation it's a whole different case. Hyper inflation usually happens on the booming economic euphoria, lead to uncontrolled higher price, easier lending by bank & institution with less collateral, and also other sector bubbles. These condition mark the peak of economic cycle and will soon going to snap, it's definitely not a good sign of sustainable upturn.

Base line of it, to determine economic condition and how it will impact currency value we can not depends on inflation only as a guide. We also need other indicator of domestic condition & economic growth such as unemployment rate, GDP, CPI, etc to understand how domestic condition shaped.
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