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The World Price Index

Released: February 10, 2015

Euro reaches fundamental Purchasing Power Parity against US Dollar

  • Gap between French and German Euro remains wide
  • WPI data shows Eurozone deflation deepens in February
  • Energy and Food sectors pull down price levels


Euro reaches Dollar Parity in Purchasing Power Parity Terms
The latest set of World Price Index (WPI) data indicates that the Euro is now fairly valued against the US dollar in Purchasing Power Parity (PPP) terms. The methodology behind the WPI involves collecting price data for a basket of goods across different countries. This allows the measurement of the real purchasing value of Euros across the different Eurozone members in terms of their relative purchasing power against a similar basket of goods in the US.

A major currency realignment between the US Dollar and the Euro which began in May 2014 has finally produced a market value of U$1 to €0.88. At this market rate the purchasing power of the WPI basket of currencies in terms of their relative value in the US in February equalled the implied PPP exchange rate of €0.88. This is based on an average of the relative prices within the Eurozone countries sampled compared with the US.

Despite the focus of traders on particular rates such as parity as measured by a 1:1 nominal market rate, an exchange rate at parity in PPP terms should have greater economic significance since it means that there is no disparity between relative prices in the country and the US for the basket of goods.


Eurozone Faces Acute Stresses Despite Parity with the Dollar
Equality between the Euro and the dollar in PPP terms does not mean that external pressures on the value of the Euro will ease. The reason why external pressures could continue is that the equality between the nominal and PPP exchange rates are based upon an average of prices within the still disparate Eurozone.

Across the four biggest members of the currency union there are still large differences in relative prices of the basket of goods included in WPI data between each country and with the US.

These differences mean that the internal deflationary pressures that have been pushing down the relative value of each country’s implied Euro have not been spread out proportionately between countries. Until all countries have a €/$ rate at close to fundamental value these deflationary forces have some way to run, particularly in the case of France, as the Chart opposite illustrates.

Changes in the PPP value of a country or currency bloc each month provides an indication of the extent to which internal prices are adjusting within the different members of the Eurozone. In February, the value of the French Euro declined sharply, but at €0.98 it still represents an overvaluation of +11.1% compared to +18.1% the previous month.

In contrast, deflationary pressures on the other major members of the Eurozone have pushed them into being undervalued against the US$ in PPP terms. Having crossed the line from close to parity with the US$ in December, to an undervaluation of -4.6% the German Euro continued this trend and reached an undervaluation of -8.3% this month. The World Price Index (WPI) German Euro’s PPP value is €0.81 to the US$ compared to a nominal exchange rate value of €0.88. The Italian Euro has fallen from an overvaluation of +12.6% in December to an undervaluation of -4.5% in February. Similarly, the Spanish Euro has moved from an overvaluation of +8.8% to an undervaluation of -0.7% over the same two months.


Deflationary Pressures
A breakdown of WPI data into its component parts provides an insight into the continuing impact of deflation across the Eurozone ahead of Eurostat’s Consumer Price Index (CPI) figures. The CPI figures for January across the 19 countries showed a year-on-year fall of -0.6%, the largest fall since the single currency was launched in 1999. This follows a fall of -0.2% in December. WPI data for February shows that prices fell in some sectors in February 2015, compared to mild inflation the year before. This occurred for Food (-7.9%), Hospitality (-7.8%) and Recreation (-5.5%). The pattern in other sectors was mixed with deflationary pressures intensifying in Energy (-14.7% vs -3.2%) and weakening in Durable Goods (-3.3% vs -7.5%). (See Chart opposite).


The World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity (PPP), reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons.

Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate. Based on WPI global data the degree of currency under or over valuation in PPP terms by country is provided in the table and chart below.

Download the full report, methodology, applications and theory.



 






















Notes to Editors
  • The World Price Index is based on original data collected by World Economics. The index is in its beta release phase where adjustments to the methodology may be made in the future.
  • The World Price Index is released during the second working week of each month.
  • Latest month market exchange rates are calculated as an average of daily rates

About the WPI
The World Economics World Price Index is designed to provide a timely and practical solution to the problems posed by international comparisons. It is intended for companies that transact across countries and currencies, for governments and for international non-governmental institutions. 

The key difference between the World Price Index and other international PPP comparisons is the timeliness of the data. WPI figures are released the same month they are collected. This means WPI data is the most up-to-date exchange rate adjustment mechanism available. 


About World Economics
World Economics is an organisation dedicated to producing analysis, insight and data relating to questions of importance in understanding the world economy. 

Currently our primary research objective is to encourage and assist the development of better and faster measures of economic activity. In cases where we believe we can contribute directly, as opposed to through highlighting the work of others, we are producing our own measures of economic activity. 

Our work is mainly of interest to investors, organisations and individuals in the financial sector and to significant corporations with global operations, as well as governments and academic economists. 

The World Price Index has been developed by World Economics, a leading provider of original economic data and comment. Sister products include the World Economics Journal, the Sales Managers’ Indexes, the Global Marketing Index, and the Country Growth Monitors.

World Economics welcomes your feedback, which should be addressed to Amelia.Myles@worldeconomics.com.

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There are 5 comments on this paper.
(Have an opinion? Add your Comment above)

World Economics
503 days ago
The World Price Index doesn't attempt to calculate labour costs or subsidies, it’s a PPP conversion factor which compares the end user cost of the same basket of goods from a country against the United States. In theory import/export costs, labour and subsidies should already be part of the price that users are required to pay at checkouts. The World Price Index is calculated against the basket of goods in the United States as this is the world’s largest economy and largest reserve currency. The data research/capture is conducted using consist methods as currently used with CPI research to aid comparisons. As the WPI is indexed against the USD it follows that the USD always has an exchange rate of 1:1 against itself. However, this does mask the fact that we have seen the cost of the basket of goods in the US has fall by -1% on average over the capture period.

sdgreen
504 days ago
I find this report really confusing and I am not certain collected data reflects the real world conditions. In the first place the entire US economy is in a state of artificiality and such comparisons are really not valid. Secondly I see no where in the report on the effect of individual state subsidies for commodities that have a dramatic effect on the CP!, thirdly the effect of labour costs are not well enumerated with also have a dramatic effect one costs, and finally there does not seem to be any attempt to look at imports/export costs with also have a huge effect. Confidence in this report is suspect at best.

World Economics
641 days ago
Derek, The World Economics WPI is not created using any third party data. World Economics researches the prices that make up the basket of good which we have selected and the calculations are performed in house. For a full breakdown of the methodology please the full report. The WPI is calculated monthly with our start month of January 2011 being represented by the index value of 100. We do not use any World Bank data.

Derek Blades
642 days ago
I am pqrticularly interested in your WPI.  My understanding is that this is acually the latest PPP with US = 100 taken from World Bank sources - probably WDI.  Is that correct?

Itidal Agha
794 days ago
WPI looke like a more accurate and up todate as it releases a monthly data, But it is for the top ten economies of the world which counts as 60% of the total world GDP, if the sample size is larger it would make the calculation more accurate. And the monthly release of data might be affected by the external factors and the unpredictable economic and natural factors that might affect the world economic activity.




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