The most recent statistics from the Office of Labor Statistics (BLS) show that production prices increased 2.6% in May compared to the previous year. The figure was in line with the forecasts, but a little above the growth of 2.4% in April.
Excluding volatile food and energy categories, prices increased 3.0% in the last year, being below the 3.1% prediction and with a performance lower than the 3.1% increase in the previous report.
Monthly, both the general production price index (IPP) and the underlying increased 0.1%, being below market expectations.
Market reaction
The US dollar is still under a strong pressure on Thursday, sinking below the 98.00 support for the first time since March 2022 when measured by the US dollar index (DXY). That said, investors continue to sell the US dollar due to the growing commercial uncertainty.
FAQS inflation
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is often expressed as an intermennsual and interannual percentage variation. The underlying inflation excludes more volatile elements, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. The underlying inflation is the figure on which economists focus and is the objective level of central banks, which have the mandate of maintaining inflation at a manageable level, usually around 2%.
The consumer price index (CPI) measures the variation in the prices of a basket of goods and services over a period of time. It is usually expressed as an intermennsual and interannual variation. The underlying IPC is the objective of the central banks, since it excludes the volatility of food and fuels. When the underlying IPC exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
Although it may seem contrary to intuition, high inflation in a country highlights the value of its currency and vice versa in the case of lower inflation. This is because the Central Bank will normally raise interest rates to combat the greatest inflation, which attracts more world capital tickets of investors looking for a lucrative place to park their money.
Formerly, gold was the asset that investors resorted to high inflation because it preserved their value, and although investors often continue to buy gold due to their refuge properties in times of extreme agitation in the markets, this is not the case most of the time. This is because when inflation is high, central banks upload interest rates to combat it. Higher interest rates are negative for gold because they increase the opportunity cost to keep gold in front of an asset that earns interest or place money in a cash deposit account. On the contrary, lower inflation tends to be positive for gold, since it reduces interest rates, making bright metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
