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) is 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 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 a 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 is calculated by dividing the current dollar GNP figure by the constant dollar GNP figure.

Gross domestic product implicit deflator is 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 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 Commerce" 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.

Merchandise trade balance

It's one of the most important economic indicators. Its value may trigger long-lasting changes in monetary and foreign policies. The trade balance consists of the net difference between the exports and imports of a certain economy. The data includes six categories:

    1. food,
    2. raw materials and industrial supplies,
    3. consumer goods,
    4. autos,
    5. Capital goods,
    6. Other merchandise.

A separate indicator that belongs to that group is the "US - Japan Merchandise Trade Balance".

Employment Indicators

The employment rate is an economic indicator with significance in multiple areas. The rate of employment, naturally, measures the soundness of an economy (See Figure 3.1). The unemployment rate is a lagging economic indicator. It is an important feature to remember, especially in times of economic recession. Whereas people focus on the health and recovery of the job sector, employment is the last economic indicator to rebound. When economic contraction causes jobs to be cut, it takes time to generate psychological confidence in economic recovery at the managerial level before new positions are added. At individual levels, the improvement of the job outlook may be clouded when new positions are added in small companies and thus not fully reflected in the data. The employment reports are significant to the financial markets in general and to foreign exchange in particular. In foreign exchange, the data is truly affective in periods of economic transition-recovery and contraction. The reason for the indicators' importance in extreme economic situations lies in the picture they paint of the health of the economy and in the degree of maturity of a business cycle. A decreasing unemployment figure signals a maturing cycle, whereas the opposite is true for an increasing unemployment indicator.

Consumer spending indicators

Employment Cost Index (ECI) measures wages and inflation and provides a comprehensive analysis of worker compensation, including wages, salaries and fringe benefits. Consumer Spending Indicators grounded on data due to the retail sale volume is important for the Forex because it shows the level of consumers demand and their sentiments, which is initial data for the calculation of other indicators such as Gross National and Gross Domestic Products.

Generally, the most commonly used employment figure is not the monthly unemployment rate, which is released as a percentage, but the non-farm payroll rate. The rate figure is calculated as the ratio of the difference between the total labor force and the employed labor force, divided by the total labor force. The data is more complex, though, and it generates more information. In Forex, the standard indicators monitored by traders are the unemployment rate, manufacturing payrolls, non-farm payrolls, average earnings, and average workweek. Generally, the most significant employment data are manufacturing and non-farm payrolls, followed by the unemployment rate.

Retail Sales are a significant consumer-spending indicator for foreign exchange traders, as it shows the strength of consumer demand as well as consumer confidence. As an economic indicator, retail sales are particularly important in the United States. Unlike other countries such as Japan, the focus in the U.S. economy is the consumer. If the consumer has enough discretionary income, or enough credit for that matter, then more merchandise will be produced or imported. Retail sales figures create an economic process of "trickling up" to the manufacturing sector. The seasonal aspect is important for this economic indicator. The retail sales months that are most watched by foreign exchange traders are December, because of the holiday season, and September, the back-to-school month. Increasingly, November is becoming an important month, as a result of the shift in the former after-Christmas sales to pre-December sales days. Another interesting phenomenon occurred in the United States despite the economic recession in the early 1990s. The volume of retail sales was unusually high while the profit margin was much thinner. The reason was the consumer's shift toward discount stores. Traders watch retail sales closely to gauge the overall strength of the economy and, consequently, the strength of the currency. This indicator is released on a monthly basis.