Understanding CPI, Inflation, Deflation and Fed Rates.

Introduction hello guys this is Venit from H Forex today is the 18th of August 2024 and I want to today just have a little chat about CPI inflation deflation how does it all kind of come together with the fed's uh interest rate policy so first What is CPI? we need to understand what CPI is it is Consumer Price Index and it is basket of a lot of things that we need and use on a day-to-day basis like food the price of gasoline rent or uh medical services that we use on a on a day-to-day basis so that is measured on a monthly basis so if that basket of goods and services cost 105 this month compared to $100 last month there is a 5% increase that means there is an inflation of 5% month over month inversely if the same basket of goods and services cost 95 this month compared to $100 last month there that is called a deflation so there's a deflation of 5% What happens when there is Inflation? so what happens when there is inflation in the marketplace above and beyond what is normal and we'll talk about what normal is so people think that prices are going higher faster than they would like to and what they do is to start buying things and holding things so what that does is creates a lot of artificial demand from future brought into the present so what happens economy starts to overheat and there are not enough goods and services because people are holding things people are buying things prematurely so that is of course not good for the marketplace because now we are producing things and we are using things that we don't need to so there is undue pressure on the commodity prices and on the raw material prices that again increases the prices of the goods and services month on-month basis that can get out of hands and the inflation rates can climb really high really fast and lead to an extreme condition called hyperinflation which is really really bad for the economies the prime example today is Zimbabwe where there is so high inflation that every few years they have to introduce a new currency so hyperinflation what it does is it kills the economies it kills the currency because your money is worth less and you start to lose confidence in the money or in the currency that you're holding and Central Banks don't want that situation Why is Deflation bad? so now let's look at deflation why is deflation bad because your money is now gaining value or gaining strength month over month so what you do is you instead of buying goods and services you want to hold money and you don't want to buy anything because you think hey next month I'm going to be able to buy much more with my money so what that does it it slows the economy down to a point where factories and businesses cannot sustain themselves because there is no not enough Sal there's not not enough business activity to keep them going to pay wages so that results in chop cuts and business closures so any extreme either too much inflation or too much deflation is bad so now how does central How do Central Banks Control this? bank or how do governments they stop or control these two extremes they do that by either increasing or decreasing interest rates so now if there is too much inflation that's when people don't have enough confidence in keeping their money what government does they increase interest rates so people are encouraged to save money because now they know that hey if they put the money in their bank is going to increase in value because they're going to get more units of the money in the way of Interest so that encourages them to save money and not to go spend it in a hurry and bring the future demand into present and that way economy can grow at a sustainable Pace it also has another side effect it makes that currency that much more attractive for international investors so now as I've said before so many times money flows where it's treated the best so now increasing interest rates attracts foreign investments people from outside of the the country want to come in and invest in the bonds for that particular country and what that does is increases the value of that particular currency so if the interest rates are going high it attracts Investments it attracts savings increasing the value of the currency now the opposite happens in the case of deflation if people are holding money and they're not spending money and businesses and and the economy is slowing down businesses are closing a lot of jobs that are being lost because people are just holding on to the money because maybe they're getting too much return on the money their money is getting stronger on a month-to-month basis in that particular case what Central Bank central banks do is they decrease or cut interest rates and that encourages spending that encourages people going out and start buying things start spending money and create the demand for those goods and services which leads to job creation new businesses opening and a vibrant economy so it's a cycle that kind of repeats itself every few years so now let's talk What’s Happening Right Now? about what's happening now so we know that the economy is slowing down we know that the raw material or the commodity prices are crashing like anything we know the productivity is slowing down we know that unemployment is even though yes it's positive we are creating jobs Bo but the rate of the job creation has fallen dramatically so not nearly enough jobs are being created to satisfy the supply of the labor in the marketplace so now to mitigate all of that fed has said okay they are going to drop the interest rates starting next month which is uh their September meeting now the question is how much are they going to drop the rates SP so 50% are saying 25 basis points or 0.25% the other 50% are saying it's going to be half a% or 50 basis point so bigger the rate cut worse it is for the dollar so if it's a 25 basis point dollar may or may not drop but if it's a 50 basis point the dollar will drop in all likelihood because it's now becoming less and less attractive for the investors to park their money in the dollars because the bonds are yielding Less on the other hand stocks are getting more attractive precious metals are getting a bit so like I've said so many times before money is going to go where it's treated best and right now US dollar especially in the environment where the interest rates are being dropped is not being treated the best it's treated best in stocks it's Tre best in precious metals and there are some other currencies which are more attractive than the US dollars for the investors so we've covered a lot of Conclusion ground today like what is CPI how inflation and deflation affect the economy and why the value of the dollar can fluctuate when the Federal Reserve adjusts the uh interest rates so the FED aims for what is often called goldilock zones of inflation which is just around 2% give or take because it's considered to be the sweet spot for the economy at around 2% prices are rising just enough to in encourage people and spend and invest which keeps the economy healthy and growing it is not so high that it creates instability and it's not so low that we risk slipping into deflation so the economy can slow way too much so when inflation is in this Goldie Lock Zone it helps maintain a balance keeping the economy moving forward steadily without overheating or stalling this is why Fed works so hard to manage interest rates and other economic policies to keep in inflation rate right around 2% Mark if inflation gets too high the FED May raise rates to cool things down if it gets too low or if there is deflation the FED might lower the rates to give economy a boost so I hope I'm able to address uh what inflation is what deflation is and how fed uses interest rates to fight it and keep that interest or inflation rate right around that Goldie log zone of 2% so I think that's that's about uh about the topic guys so Join Our Discord Server if you guys are watching this on any of the social media please join our Discord server the link is in the is in the description there's lots of good information lots of good trade setups and lots of educational material that you guys are going to love so I can't wait to see you guys on our server till next time you guys have a good weekend