World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data


The World Price Index

Released: September 9, 2014

WPI reports sharp drop in the value of the Brazilian Real as recession bites

  • German euro falls to only 4% overvaluation in October
  • Russian Rouble hits record 11% undervaluation
  • China’s Yuan undervaluation hits 15%




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.


Brazil Real
The relative overvaluation of the Brazilian Real has dropped by 11.8% to 23.5% against the US dollar in October according to the latest monthly WPI data. The World Price Index indicates a PPP rate of 2.99 Reals to the dollar compared with the official rate of 2.42. This is the first fall in the relative value of the real in PPP terms since it began steadily rising month-on-month from February 2014. The short-term reasons for the easing in the nominal value of the currency are evident. Brazil’s trade figures for September indicated that the country recorded a trade deficit of US$939 million after six successive months of surpluses. The last low point of the currency in February had followed a historic deficit of US$4,058 million in January. The future path of the currency lies partly in the hands of Brazil’s Central Bank Governor which, despite the economy falling into a recession in the last two quarters, is unlikely to reduce interest rates from their current level of 11% until the previous round of tightening, has dampened down inflationary pressures. The other factor is the result of the second and final round of the presidential election and any impact a change in administration would have on fiscal and monetary policy. The recession had been anticipated since the end of 2013 by the World Economics Sales Managers’ Index (SMI) for Latin America, which is influenced heavily by conditions in the Brazilian economy. Business confidence has declined successively every month since September 2013, but the decline in GDP in Brazil was delayed by the short-term impact of the FIFA 2014 World Cup.


Eurozone
The internal inconsistencies in the Eurozone due to the wide variation in the internal purchasing power of the currency against the US dollar continue to create noticeable inconsistencies. For example, in October in PPP terms the WPI Index indicated that because of differences in the relative prices between countries, the Euro in France is overvalued by 24.8% in relation to the US Dollar. In contrast, the Euro in Italy is overvalued by 11.7%, but the Euro in Germany is overvalued by only 4.2%.

October data from the WPI indicated that the PPP overvaluations of all three countries fell against the dollar. However, between September 9th and October 8th currency markets swung in favour of the greenback and the nominal exchange rate value of the dollar appreciated by 4% against the Euro. In contrast, while the French Euro in PPP terms depreciated at the same rate as the market, the German rate fell by 5% and the Italian rate by only 1%. The demonstrably greater flexibility of the German economy to keep its exports competitive (See Chart) compared to the other major economies will likely counteract attempts by the ECB to push down the value of the European currency through quantitative easing to combat deflation and kick-start economic growth.


Russia Rouble
The Rouble has fallen sharply against the dollar to a new low as the impact of economic sanctions hit confidence. October’s WPI data suggests that the Russian currency is undervalued against the dollar by 10.9%, compared with an undervaluation of 4.1% in September. The World Price Index Rouble PPP value is 35.51 to the dollar compared to a nominal exchange rate value of 39.85 which has been depreciating steadily since July. In addition, a weakening of the oil price with Brent Crude trading below US$89 could not have come at a worse time for Russia’s Central Bank from the perspective of its interest rate policy. Further downward pressure is expected on the Rouble which indicates the need to tighten in an attempt to defend the currency. This is reinforced by rising consumer inflation which suggests an interest rate rise from its current level of 8% at the Bank’s next meeting on October 31. On the other hand high interest rates are already threatening to push the economy into a recession by supressing consumer demand and investment.


China Yuan / Renminbi
October WPI data for China reports that the PPP value of the Chinese Renminbi is continuing to fall against the dollar. The increased undervaluation trend that started in July has continued every month since and in October the undervaluation reached 15.1%, from 12.4% in September.


 

























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
380 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
380 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
518 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
518 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
671 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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