Inflation

Inflation measures how quickly prices in an economy rise, usually through a consumer price index (CPI) compared with a year earlier. An inflation rate of 3% means a typical basket of goods costs about 3% more than twelve months ago.

For currency traders inflation matters mainly through the central bank. Most central banks aim for low, stable inflation, often around 2%. If inflation runs hot, markets expect higher interest rates, which tends to support the currency; if it falls quickly, they expect cuts.

The release matters less than the surprise against the forecast. A CPI print of 3.4% against an expected 3.1% can jolt a currency within seconds; the same 3.4% may be ignored if it was fully expected. Core inflation, which strips out volatile food and energy prices, often gets more attention than the headline figure.

It is a misconception that high inflation is simply good for a currency because rates go up. Over the long run, persistently high inflation erodes a currency's value, so the short-term reaction and the long-term effect can point in opposite directions. See what moves currency prices and the economic calendar.