Part III of Fundamental Analysis, Chapter 9, we discuss auxiliary inflation indicators.

The auxiliary inflation indicators include:

• GDP deflator (GDP Deflator);
• Import prices (Import Prices);
• Export prices (Export Prices);
• Average hourly earnings (Average Hourly Earnings);
• Employment cost index (Employment Cost Index);
• Unit labor cost (Unit Labour Cost);
• Real earnings (Real Earnings).

These indicators provide additional insights into inflationary trends and their impact on various aspects of the economy, such as labor costs, international trade, and productivity. Analyzing these indicators alongside the main inflation measures can help financial analysts and traders make more informed decisions in the forex market.

The GDP deflator is a measure used to assess inflationary pressures in the economy and can serve as an alternative to the Consumer Price Index (CPI). Mathematically, the GDP deflator is the ratio of nominal GDP to real GDP, where nominal GDP represents past GDP reports adjusted for inflation in constant prices. Thus, the indicator compares past GDP data with the current purchasing power as it exists at the moment.

Such calculations allow for a more flexible measure compared to the CPI, as they take into account changes that occur due to the introduction of new goods or shifts in consumer preferences. In contrast, the CPI is based on a fixed consumer basket.

The publication of the GDP deflator value has a significant impact on the market and can lead to an increase in the value of the U.S. dollar if there are expectations of rising key interest rates. Quarterly, on the 20th of the month following the end of the quarter (at 16:30 Moscow time), the U.S. releases the results of the GDP deflator calculations, along with GDP data. The data is then refined and revised over the next two months.

Import Prices: The import price index is considered an inflation indicator that reflects changes in the prices of imported goods during a month. This indicator is a component of the Consumer Price Index (CPI) calculation, as it includes import prices and represents the contribution of changes in import prices to the overall change in the consumer basket. The values of the import price index do not have a significant impact on the market. When interest rates increase, a rise in the index value can lead to an appreciation of the currency exchange rate. Data on import prices are released monthly, usually around the 10th of the month, and are published simultaneously with the export price index.

Export Prices: Similar to import prices, the export price index is calculated and has limited influence on the market. Export prices are published concurrently with import prices and also have a proportional impact on the currency exchange rate. When the index increases, and there are expectations of rising interest rates, the currency exchange rate tends to appreciate.

Both import and export price indices are important for assessing the inflationary pressures associated with international trade. They provide insights into the cost dynamics of imports and exports and their influence on domestic inflation levels. These indicators are closely monitored by economists and traders as they analyze inflation trends and make trading decisions based on the expected impact on currency exchange rates.

Average Hourly Earnings: The Average Hourly Earnings index reflects the potential inflationary pressure. As production costs, particularly labor costs, increase, prices of goods are likely to rise, leading to inflation. When interest rates rise, an increase in the Average Hourly Earnings index can contribute to an appreciation of the currency exchange rate. This indicator has a significant impact on the market. Data on Average Hourly Earnings is published monthly on the first Friday at 16:30 Moscow time, simultaneously with the Nonfarm Payrolls data.

Employment Cost Index: The Employment Cost Index is considered the most accurate measure of labor expenses and is also seen as a leading indicator of inflation expectations. It reflects the total compensation of employees, including wages, unemployment benefits, insurance, vacation pay, etc. The Federal Reserve relies on the Employment Cost Index in its monetary policy as one of the key indicators for medium- to long-term forecasts. An increase in this index can contribute to an appreciation of the currency exchange rate when there are expectations of rising interest rates. Data on the Employment Cost Index is published quarterly in the last week of the month at 16:30 Moscow time.

Unit Labour Cost: This indicator determines the efficiency of economic development and reflects the production costs per unit of output. It also serves as an indicator of inflationary processes associated with wage increases. In practice, analysts examine the Unit Labour Cost index together with the Productivity index. When the cost per unit of output and labor productivity both increase, there may be a need to raise interest rates, which can lead to an appreciation of the currency exchange rate. This index can have a significant impact on the market. Data on Unit Labour Cost is published quarterly before the 10th day of the month at 16:30 Moscow time, and it is released together with the Productivity index.

Real Earnings: Mathematically, calculations for the Real Earnings indicator are made relative to the wage level in 1982, which allows for the exclusion of inflation's influence on the measure. Thus, Real Earnings can serve as an indicator of inflation processes related to labor costs. The report only includes statistical data from the previously published employment report, so the index does not have a significant impact on the market. When interest rates rise, an increase in Real Earnings can lead to an appreciation of the currency exchange rate. Data is published monthly at 16:30 Moscow time, simultaneously with the Consumer Price Index.

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