World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data


The World Price Index

Released: December 9, 2014

Russian Rouble plunges to 30% undervaluation in just 16 weeks

  • Fall in Rouble may provoke a recession to restore balance
  • Japanese Yen swings from 3% overvaluation to 2% undervaluation
  • Canadian Looney maintains slide against the USD




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.

Download the full report, methodology, applications and theory.


Russian Rouble
The recent value of the Russian Rouble shows how currencies can diverge significantly from their implied PPP exchange rates as a result of external conditions. The Rouble is continuing its fall against the US$ in December as shown in the latest WPI data. Over the month the currency fell in PPP terms from an undervaluation of 20.0% last month to 30.4% in December. The World Price Index Rouble PPP value is 35.00 to the US$ compared to a nominal exchange rate value of 50.30. In August, the Rouble had actually been overvalued by 2% against the US$ in PPP terms.

The main external conditions impacting on the Rouble over the last six months, the tightening of economic sanctions and the loss of investor appetite for Russian securities, have now been reinforced by a falling oil price. Brent crude, the benchmark oil price, has fallen from US$85.0 a barrel on November 3 to US$70.4 on December 3. This impacts directly on Russia’s export earnings and on the nominal value of the Russian currency.

The country’s finance minister, Anton Siluanov, recently estimated that the weakness in the oil price would cost the economy some US$90 to 100 billion a year on top of the US$40 billion imposed as a result of the economic sanctions. Russia is lobbying OPEC, dominated by the middle-eastern countries, to cut oil production to reinforce prices, but so far this has had no effect. As stated last month the only short-term way for the Russian currency to attempt to restore its PPP value against the Dollar will be by the painful route of domestic deflation squeezing Russian living standards. A recession is now highly likely. The Russian economy is forecast by the government to contract by 0.8% in 2015, as against a previous forecast of real GDP growth of 1.2%.


Japanese Yen
The World Price Index in December reports that the Japanese Yen is now undervalued against the US$ by 1.7% in PPP terms compared with an overvaluation of 3.4% the month before. The market Yen to US Dollar exchange rate was 118.57 compared to an estimated PPP rate of 116.58.

The shift from over to undervaluation should come as no surprise. It is an inevitable consequence of the easy monetary policy followed by the Bank of Japan since April 2013 which through its bond buying programme has been flooding the market with money to combat deflation. The Bank of Japan is buying government securities at an annualised rate of ¥80 trillion, roughly equivalent to the supply of new securities needed to fund the public sector deficit. This is pushing down yields, but the fact that inflation is still likely to undershoot the target rate of 2% means that the market expects large scale bond buying to continue. A recent downgrade by Moody’s has had no effect on investor appetite for Japanese bonds in the face of the Bank of Japan’s policies. The WPI will continue to chart how the currency continues to perform against the dollar in PPP terms each month.


Canadian Dollar
In December data from the World Price Index estimates that the overvaluation of the Canadian dollar against the US$ fell from 9.3% in November to 6.6%. The WPI indicates a PPP rate of 1.22 to the US Dollar compared with a nominal exchange rate of 1.14. This is the third month that the PPP value of the Looney has fallen against the US Dollar.

The main explanation for the fall in the relative value of the Canadian currency over the last three months lies in the weakness in oil and other commodity prices resulting from lower global demand and a glut in supply. Meanwhile rising inflation and low yields have weakened the attraction of Canadian government securities to investors. The government reported on November 21 that Canada’s rate of consumer price inflation rose by 2.4% in October from the year before, the seventh successive month that the CPI met or exceeded the central bank’s target rate of 2%. At the same time the Bank of Canada decided to keep its benchmark interest rate at 1%, a level it has maintained since September 2010.


 







































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.

You can follow World Economics on Twitter and Facebook.

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

World Economics
428 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
428 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
566 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
566 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
718 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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