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The World Price Index

Released: July 12, 2016
Euro Chasm Grows to 20% Among Eurozone Countries as Sterling Valuation Plunges After Brexit Vote

The World Price Index (WPI) data for July illustrates the dramatic impact of the British people’s vote in favour of leaving the European Union has had on the value of sterling. The sterling dollar exchange rate has been volatile as the political fallout and contrasting expectations about the future of the UK economy has increased uncertainty in financial markets. On the reference date used to calculate the WPI in July, one British pound bought US$1.30 as against US$1.45 a month before, a devaluation of 12.2%.

Sterling’s drops to 7% undervaluation
The WPI which is used to estimate the fundamental value of currencies in terms of purchasing power parity (PPP) against the US dollar, provides a useful counterpart to the continually fluctuating relative value of currencies on foreign exchange markets. These daily movements reflect short-term considerations are separate from a currency’s longer-term purchasing value based on differences in the domestic relative prices of traded and non-traded goods between countries.

Sterling has been overvalued against the dollar since the WPI data series began in December 2012. Last month, a week before the referendum the currency was still overvalued by 5.1%, but by the July reference date it had fallen to an undervaluation of minus 7.3%. The WPI rate, or the fundamental value for sterling against the US$ in July, was £0.72, below the market exchange rate of £0.77, but it may be some time before the exchange rate settles. The current undervalued rate meanwhile is favourable for British exporters and for reducing the current account deficit, although at the risk of some imported inflation. There is little sign of rising prices at this point across the main sectors in the UK economy apart from in the Hospitality industry.

Very large internal Euro strains now evident
The WPI data for July shows that the Euro has fallen to a level of undervaluation of 2% against the US$ from an overvaluation of 2% in June. In July on the foreign exchange market one US dollar bought only €0.90, but its WPI value was €0.88. One of the strengths of the WPI methodology is that it allows a comparison of the PPP values of a Euro in different countries. The internal strains of belonging to the Euro are now evident. In July, 2016 at the Euro dollar exchange rate German prices were very competitive producing an undervaluation of 11.9%, still greater than the current undervaluation of sterling. In stark contrast France remains uncompetitive with an overvaluation of 10%, far higher than Germany, Italy and Spain.

Yen 26% Overvalued

 In Asia, the latest WPI data shows that the relative rise of the Yen is continuing. In July, the Japanese currency rose by 7% to become 26% overvalued against the dollar in PPP terms. One US$ bought ¥100.9 against a WPI rate based on relative price differences of ¥126.9. The last time the currency was at PPP parity with the US$ was in September 2015, but the rising trend since then is causing the Japanese authorities considerable anxiety.

About 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.

Notes to Editors
  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released on the 2nd Working Tuesday of each month.
  • Latest month market exchange rates are calculated as an average of daily rates.

About The World Price Index
The World Price Index is calculated monthly from a basket of internationally comparable goods and services. It is designed to alleviate the horrendous problems associated with analysing economic or market data using currency market exchange rates.

Exchange rates vary with extraordinary rapidity, frequently with little obvious link to economic reality, but fatally distorting the perception of value in markets and economies. It is vital when analysing international data, whether for market analysis purposes, or to allocate resources across the globe, to review data using an international yardstick of value. This can only be done using Puchasing Power Parities (PPP), which make allowance for the purchasing power of currencies within individual countries to make comparisons based on a standard currency, usually "international dollars".

There are various sources of PPP data, but most are of only academic interest as they are years out of date. The World Price Index is the only available index updated monthly to provide an easy way of reviewing trends or relative values of market or economic data in realistic terms.

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. Its parent company Information Sciences Ltd has a long history of the development of key business information today used throughout the world, including the origination of the Purchasing Managers Indexes in Europe and Asia (now owned by Markit), and the development of WARC a global information provider for major corporations .

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.

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