A1 Trading Company

Fundamental analysis guide

How to Trade CPI Data like a PRO

How to Trade CPI Data like a PRO: Inflation EXPLAINED!

Focuses of this lesson

In this lesson, we will focus on these three aspects of trading inflation:
What is CPI?
How to measure inflation
How to trade inflation

What is Inflation and Why should Traders Care?

Inflation is the rise in the price of goods and services, often referred to as the loss of fiat purchasing power. Traders should care because central banks care deeply about inflation. Central banks aim to keep inflation at around 2% per year, and the actions they take to achieve this goal can significantly impact the markets.

High inflation can lead to economic instability, while low inflation may indicate recession or lack of demand. The "sweet spot" of moderate inflation is the ideal scenario for sustainable growth, aligning with the Federal Reserve's goal of maintaining moderate inflation alongside maximum employment.
Traders should care because central banks care
central banks have a very strong interest in keep inflation at 2% /year
the actions central banks may take to accomplish this agenda can move the markets

Consumer price index (CPI)

The Consumer Price Index (CPI) tracks changes in the prices of goods and services. It measures a "basket" of goods and services and monitors their price changes. CPI components include food and beverages, energy, housing, transportation, medical care, recreation, and others.

CPI components

food & beverages
energy
Housing
Transportation
medical care
recreation
other

Core CPI components

food & beverages
energy
Housing
Transportation
medical care
recreation
other

Measuring inflation

US Example
Understanding inflation involves assessing its position, which can range from disinflation to hot inflation. Disinflation signifies a slowing in the rate of inflation, while the "sweet spot" indicates moderate inflation, ideal for economic growth without overheating. Hot inflation, on the other hand, poses risks like runaway prices.

CPI <1.5%

Fed may cut rates
"Disinflation"
= Not good

1.5% < CPI < 3.5%

Fed may hold
"Sweet spot"
= Good

3.5% < CPI

Fed may hike
"hot inflation"
= Not Good
high inflation can lead to runaway prices, which can hurt economy
low inflation shoes economic recession & lack of demand / growth
"Sweet spot" inflation is ideal. It allows growth without overhearing

How to Trade Inflation

Dissinflation

During disinflationary periods, traders might consider bullish positions in assets like gold, silver, stronger currencies, or stocks/indices.

Bullish

gold / silver
stronger currencies
bonds

Bearish

stocks / indices
USD

"Sweet Spot" (CPI 1.6% -3.5%)

In the "sweet spot" of moderate inflation, bullish positions in stocks/indices, non-USD currencies, gold, or bonds may be favorable.

Bullish

Stocks / indices
non - uSD currencies
bonds

Bearish

gold
USD

"Hot Inflation"

When inflation heats up, traders may opt for bearish positions in USD, stocks/indices, non-USD currencies, or bonds.

Bullish

Stocks / indices
non - uSD currencies
bonds

Bearish

gold
USD
A1 Edgefinder

All-in-One Fundamental Dashboard

Using powerful market data such as COT, retail sentiment, and seasonality, the EdgeFinder's top setups page will automatically build a list of the top buys and top sells.

EXPLORE MORE FEATURES

Free Telegram

Join free telegram for analysis, trade ideas, & trading resources!

Join telegram

Home
Edgefinder
Signals
There is a significant degree of risk involved in trading securities. With respect to foreign exchange trading, there is considerable risk exposure, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.
homesmartphonelaptop-phonemenucross-circle linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram