What You Should Know about Inflation for Trading

Several key economic indicators point you toward ways of identifying the risk of inflation, which can be useful in trading. The primary overall indicator is gross domestic product; it’s released quarterly by the United States Department of Commerce’s Bureau of Economic Analysis (BEA). You can also follow monthly trends by keeping your eye out for the consumer price index, the producer price index, and retail sales data.

  • Gross domestic product (GDP) represents the monetary value of goods produced during a specific period in the economy. In the United States, GDP is released quarterly in three different versions.

    The first version, which includes advance data for the previous quarter, is released at 8:30 a.m. on the last business day of the months January, April, July, and October. Preliminary data is released a month later, and the final numbers are released a month after that. GDP is important to traders because it indicates the pace at which the economy is growing.

    In the GDP, you’ll find numbers for consumer spending, private domestic investment, government or public spending, and the net exports. Essentially, it includes all information about labor and property involving business activities inside the confines of the United States. If GDP fails to meet expectations set by the analysts or exceeds market expectations, stock prices will be affected at least temporarily.

    For a glimpse of what may be in store for the future, pay attention to the rate that inventories are increasing. It can be a leading indicator that growth is slowing or consumer demand is changing.

    Even though the final official numbers are released quarterly, the advance reports and preliminary reports give you a good indication of what to expect in the final numbers. You can get full details about the GDP reports. You can track the release schedule for the GDP reports, as well as other government statistical reports.

    Often the report is posted at the Bureau of Economic Analysis early in the morning before the actual release and embargoed until the official release time, so as a trader you may be able to get a heads up before the news is actually reported by the press.

  • Consumer price index (CPI) measures the cost of a representative basket of goods and services, including food, energy, housing, clothing, transportation, medical care, entertainment, and education. Each type of cost is weighted. For example, medical costs are weighted more highly in recent years, because they are rising at a faster pace. In addition to the broad CPI, a core rate is issued that excludes food and energy.

    The core rate is an indicator you can watch for general price shifts. The financial markets, in general, look for a rate of increase in the range of 1 percent to 2 percent; anything higher may be a sign of inflation and can cause at least a temporary shock to stock prices. Any shock to stock prices obviously can be an opportunity for traders.

    The CPI is released by the Labor Department about 8:30 a.m. around the 15th of each month and reflects data from the previous month. You can track the CPI at the website of the U.S. Department of Labor’s Bureau of Labor Statistics.

  • Producer price index (PPI) is thought of more as a basket full of other indexes that affect domestic producers, including goods manufacturing, finishing, and agricultural and other commodities. The Labor Department collects more than 100,000 prices each month from 30,000 production and manufacturing firms to calculate this basket.

    The markets pay close attention to the index, because even though it isn’t as powerful an inflation index as the CPI, it gives traders clues about what to expect in the next CPI release. The PPI is released a couple of days before the CPI, at 8:30 a.m. usually around the 13th of each month, and it reflects data from the previous month.

  • Retail sales data tracks information about (you guessed it) retail sales by large corporations and by small mom-and-pop retail outlets. The U.S. Census Bureau, which is a part of the Department of Commerce, surveys hundreds of firms each month using a random sampling of retail outlets that make federal insurance contributions to collect this data, which is particularly important whenever you’re trading stocks in the retail sector.

    The survey looks at changes in retail numbers from month to month. When the number is a negative number, it means sales levels decreased from the previous month. This type of negative news can be a shock to stock prices, especially for companies in the retail sector. The data is released about two weeks after it’s collected, or at 8:30 a.m. about the 12th of each month.

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