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The World Price Index

Released: July 15, 2014

Russian Rouble moves from parity with US Dollar to a 3% overvaluation

  • Japanese Yen continues to strengthen after long decline.
  • Chinese Yuan undervaluation reaches 7%.
  • Argentine Peso continues strengthens to 28% overvaluation.




The World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity, 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.

Download the full report, methodology, applications and theory.


Russian Rouble
The Russian Rouble has moved from parity with the US$ in PPP terms last month to a 2.7% overvaluation in July. The World Price Index Rouble PPP value is 35.43 compared to a nominal exchange rate value of 34.50. This is a continuation of a five month trend of steady strengthening of the Russian currency after the Rouble reached an undervaluation floor in March 2014.

The Rouble’s fortunes have been reversed since the crisis in the Ukraine, which began in February 2014, initially led investors to sell off the currency. There have been three changes in the currency’s favour since then.
  1. The Central Bank raised interest rates in response to the initial fall in the currency and has warned that further tightening is possible if inflation remains above target levels.
  2. The civil discontent in the Ukraine has moved into a new phase. The conflict between pro-Russian separatists and the authorities has escalated, but the fear of Russian military intervention in the short-term has diminished.
  3. The invasion of Iraq by the Islamic insurgency Isis is generally bullish for the future path of oil prices favouring Russia as a major producer.



Japanese Yen
The Japanese Yen’s overvaluation against the US dollar in PPP terms has risen by 1.7% to reach 14.8% in July with a nominal exchange rate of 102.65 to the US$ compared to a World Price Index rate of 116.06. It appears that the impact of Abenomics and the Bank of Japan’s monetary easing on the Japanese currency has run out of steam. The overvaluation of the Yen as measured by the World Price Index has fallen from 83% in December 2012 to 12% by April 2014, but since then it has fluctuated around this level and now appears to be on a rising trend again.

Although it looks as if the Bank of Japan will meet its 2% inflation target this year, deflationary tendencies have not been banished from the economy fully. Furthermore, the market value of the currency was bolstered by the surprise news that Japan’s trade deficit for May 2014 was lower than forecast producing a current account surplus greater than had been expected.


China Renminbi
According to the WPI, China’s currency should be at a rate of 5.75 Yuan to the dollar while the nominal exchange rate was 6.18. At this level the Renminbi was undervalued in PPP terms by 6.9% in July down by 0.5% on its relative value in June. The currency has fluctuated around this level since January 2013 and commentators in the US still believe its value is being kept down by foreign exchange interventions by the Chinese authorities. Without such manipulation there are countervailing factors prevailing on the currency at present with falling inflation suggesting a move upward and shrinking current account surpluses indicating downward pressure.


Argentine Peso
Measured by the World Price Index the overvaluation of the Argentine peso has increased by 3.1% on the month to reach 27.6% in July. The World Price Index indicates a PPP rate of 10.41 to the dollar compared with the manipulated market rate of 8.16. In contrast, according to the Buenos Aires Herald, the illegal or ‘blue’ exchange rate, closed at 11.95 pesos to the dollar on July 7 suggesting a black market depreciation of 8% on the previous month.


 



















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
287 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
287 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
425 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
425 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
578 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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