The Inflation metric plays a crucial role in economic analysis, as it significantly influences central bank policies regarding interest rates. Central banks closely monitor inflation to determine whether to raise, lower, or maintain interest rates, which in turn affects borrowing costs, consumer behavior, and overall economic activity.

importance of Inflation

Central Bank Decisions: Inflation levels directly impact how central banks manage interest rates. High inflation may prompt rate hikes to cool the economy, while low inflation could lead to rate cuts to stimulate growth.

Economic Health: Moderate inflation, ideally around 2%, is generally seen as healthy for an economy, fostering consumer spending and investment.

analyzing inflation data

Cooling Inflation: When inflation rates are stabilizing around the target (around 2%), it typically signals positive conditions for equities and can support currency strength.

Rising Inflation: An increasing inflation rate can be bullish for currencies, indicating economic growth and potential central bank action.

Falling Inflation: Conversely, a declining inflation rate may be bearish for currencies, suggesting economic slowdown and potential interest rate cuts.

The EdgeFinder simplifies the complexities of inflation analysis by automatically scoring and generating signals for various instruments based on inflation trends. While inflation is a multifaceted topic, the EdgeFinder streamlines this information, allowing traders to focus on actionable insights without needing to analyze every data point manually. Users can quickly access scores and insights to guide their trading strategies.

The Inflation component is a vital feature of the EdgeFinder, helping traders understand economic conditions and make informed decisions based on central bank policies.

How is this inflation data scored on the edgeFinder?

inflation score calculation for currency pairs

For currency pairs, we consider the latest reported CPI reading relative to what analyst forecasts were prior to the reported figure.

Because a currency pair involves two unique economies, the software analyzes each currency individually, and computes a total score for the pairing.

For example, for EURUSD, we consider both the Euro, and the US dollar when scoring this pair's inflation reading.

For the equation below, currency A would refer to 'EUR', while currency B would refer to 'USD'.

Calculation:
If currency A's latest CPI is HIGHER than forecasted, +1
If currency A's latest CPI is LOWER than forecasted, -1
If currency A's latest CPI is EQUAL to forecasts, +0

We repeat for currency B, but invert the impact on the currency pair
If currency B's latest CPI is HIGHER than forecasted, -1
If currency B's latest CPI is LOWER than forecasted, +1
If currency B's latest CPI is EQUAL to forecasts, +0

inflation score calculation for gold

For gold, the EdgeFinder will consider both the location and latest change to CPI when computing a final score for inflation. However, unlike currency pairs - in the computation for gold, we also consider CORE CPI for our latest change, as illustrated in the image and calculation below.

Component 1: (Change)
If latest US CPI is HIGHER than forecasted, -1
If latest US CPI is LOWER than forecasted, +1
If latest US CPI is EQUAL to forecasts, +0

If latest US Core CPI is HIGHER than forecasted, -1
If latest US Core CPI is LOWER than forecasted, -1
If latest US Core CPI is EQUAL to forecasts, +0

Component 2: (Location)
If latest US CPI < 1%, +1
If 1% <= latest US CPI >3%, 0
If latest US CPI > 3%, +1

The final score is the summation of both component 1 and component 2.

Note, the EdgeFinder considers a high inflation environment to be bullish for gold as a baseline. However, if inflation is ticking up in the most recent data alongside strong economic output data, it could suggest that the US central bank may act to take a restrictive monetary policy stance. Strong economic data accompanied with elevated inflation can be bullish for the dollar, and headwind to gold. Specific to the inflation calculation, the EdgeFinder assumes gold to be most bullish when inflation is hot but cooling, or during severe recessionary periods. The EdgeFinder considers gold to be most bearish when inflation is under control.

inflation score calculation for indices & BTCUSD

For indices & BTC, the EdgeFinder will consider both the location and latest change to CPI when computing a final score for inflation. Similar to gold, we also consider CORE CPI for our latest change, as illustrated in the image and calculation below.

Component 1: (Change)
If latest CPI is HIGHER than forecasted, -1
If latest CPI is LOWER than forecasted, +1
If latest CPI is EQUAL to forecasts, +0

(US indices only)
If latest US Core CPI is HIGHER than forecasted, -1
If latest US Core CPI is LOWER than forecasted, +1
If latest US Core CPI is EQUAL to forecasts, +0

Component 2: (Location)
If latest CPI <= 3%, +1
If latest CPI > 3%, -1

The final score is the summation of both component 1 and component 2.

Note, the EdgeFinder typically views inflation to be the least threatening to these risk on assets when it is tamed and under control. Whenever inflation becomes too high or too low, it is considered by the EdgeFinder to be a potential bearish catalyst. If inflation is too high, monetary policy could become more restrictive and harmful to businesses. On the other end of things, if inflation enters a dangerously low level, it suggests that the economy is quite weak and could hurt corporate earnings and risk sentiment.

inflation score calculation for commodities (US Oil, silver, copper, platinum)

For commodities, the EdgeFinder will consider both the location and latest change to CPI when computing a final score for inflation. However, unlike currency pairs - in the computation for gold, we also consider CORE CPI for our latest change, as illustrated in the image and calculation below.

Component 1: (Change)
If latest CPI is HIGHER than forecasted, -1
If latest CPI is LOWER than forecasted, +1
If latest CPI is EQUAL to forecasts, +0

Component 2: (Location)
If latest US CPI < 1%, -1
If latest US CPI >= 1%, +1

The EdgeFinder assumes that higher inflation is considered a more bullish environment for commodities. This is because higher inflation means rising prices, and is often accompanied with higher demand for raw materials due to strong economic output. If however economic output data is found to be weak, that will be accounted for in the EdgeFinder's total score, and may act to counterbalance this inflation reading.

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How to trade with inflation data