Rising prices and stagnated wages—this scenario might seem familiar to those who have been following the UK economy over the past few months. The Consumer Price Index (CPI) is measured as an indicator of inflation in the UK.
Over time, the CPI has steadily risen in value due to global market changes, especially commodities. However, with the recent news that the Bank of England will be increasing interest rates for only the second time since 2009, many ask how CPI will affect their trading strategy.
The most simple example of how inflation can affect your trading strategy is considering what happens when you deposit money into a savings account. Your bank might offer you an annual percentage yield (APY) of 2%, but in reality, this number is not reflective of how much your money will grow in actuality. With inflation factored in, that 2% APY would be worth significantly less in a year – so it’s essential to account for CPI when making investment decisions.
Similarly, if you’re looking to purchase a property, the current inflation rate could mean that the cost of your dream home has increased since you first started saving up.
Maintain spending power
However, there are also some silver linings to consider regarding CPI. Firstly, while prices are rising, wages are starting to creep up, meaning that consumers are still able to maintain a certain level of spending power. It is calculated that even if prices do rise, the overall purchasing power of consumers will remain about the same – meaning your day-to-day expenses shouldn’t be drastically affected.
Positively affects share prices
Secondly, inflation positively affects share prices for those considering investing in stocks, especially international ones. As foreign currencies become less valuable compared with pounds sterling, so too makes a demand for them and their respective stock markets. If you’re buying shares in an overseas company, they will likely increase in value due to this change in currency valuation.
It’s not as simple as that – stock prices are always subject to change, and no one can predict the future with certainty. But, at a time when CPI is on the rise, it’s worth bearing in mind how inflation could affect your investments.
So what does CPI mean for traders? Here we’ll look at how CPI affects your trading strategy in the UK and how you can stay ahead of price changes.
What is CPI?
CPI measures the average change in prices paid by consumers for a basket of goods and services over time. The index is calculated by taking price changes for different items in the basket and dividing them by the weightings of those items.CPI is used to measure inflation and is the key indicator used by the Bank of England. The Bank of England sets interest rates to meet their 2% target for CPI.
How does CPI affect traders?
In the UK, CPI is released monthly and significantly impacts the pound. Traders closely watch the figure to indicate whether the Bank of England will raise or lower interest rates.
If CPI is higher than expected, it could increase interest rates as the Bank of England tries to cool down the economy. This could lead to a strengthening of the pound as investors flock to British assets in anticipation of higher returns.
On the other hand, if CPI falls short of forecasts, interest rates could be cut to stimulate the economy. This would depreciate the pound as traders sell high and buy low.
How can I react to CPI?
For all you need to know about how CPI affects your trading strategy in the UK, visit our site now. We give you access to exclusive daily analysis from leading industry experts, allowing you to decide on your investment strategy.
Bottom line
In the current climate, it’s more important than ever to be aware of how CPI is impacting the UK economy – so that you can make informed decisions when it comes to your finances.
Continue reading here to find out what is ETF trading.
