World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data


The World Price Index

Released: September 9, 2014

Canadian dollar increases overvaluation to 13% on positive news

  • Rouble reverses to 4% undervaluation as further sanctions loom
  • Chinese Yuan undervaluation still increasing
  • Italian euro continues to strengthen




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.


Canadian Dollar
The Canadian dollar continues to remain overvalued against the US$ in PPP terms. The relative level of overvaluation has increased from 7% in April 2014 to 10.3% in August and again to 12.5% in September. In September, the Looney’s nominal exchange rate against the US$ was 1.09 compared to a World Price Index rate of 1.23. There are several reasons for this rise.

First, economic growth was faster than expected. Canadian GDP, rose by 0.3% year on year in June which was above market forecasts. GDP data is released monthly in Canada unlike in other OECD countries where it is only published quarterly.

Second, there was an improvement in the current account increasing the international demand for Canadian dollars. Canada’s merchandise exports rose by 1.4% in July, while imports fell marginally, raising the current account trade surplus from C$1.8 billion in June to C$2.6 billion in July. This is the third consecutive month the trade balance has improved.

Finally, the rate of consumer price inflation fell from 2.4% per year in June to 2.1% in July raising confidence and easing up real yields on Canadian debt.


Russia Rouble
The relative value of the Russian Rouble compared to the US dollar has reversed from over to undervaluation in September compared with July and August. The impact of the intensification of the Ukraine crisis has hit the currency hard. Rouble selling in currency markets has meant that it has flipped and moved from being overvalued by 1.7% against the US$ based on August WPI data to being undervalued by 4.1% on September numbers. With the threat of even tighter international sanctions against Russian exports and individuals, the short-term props of high interest rates and oil prices are no longer sustaining the Rouble in line with its PPP par value with the dollar reached in June.


Chinese Yuan / Renminbi
China’s currency against the dollar continues to lose value according to the latest price data from the World Price Index. The September figures show that the currency was 12.4% undervalued compared with 9.8% in August. The market Yuan to dollar exchange rate was 6.17 compared to an estimated PPP rate of 5.40, the fourth month in which the Yuan has depreciated against the US currency. This direction is pleasing Chinese exporting companies even if it leads to accusations that China is manipulating the value of its currency. Research derived from the World Economics China Sales Managers’ Index (SMI) in August found that only 17.5% of panellists polled agreed that the value of the currency was harming their sales, down from 19% in July.


Eurozone Euro
The relative valuation of the Euro against the dollar measured in terms of WPI data has been steadily declining for the last six months. In Germany, the value of a Euro against the US$ was overvalued by 12% in March 2014 measured in PPP while in September its overvaluation stood at 9%. In France, the overvaluation has declined from 37% in March to 29% in September. This steady weakening of the Euro should continue as the European Central Bank edges closer to launching a major programme of quantitative easing to combat deflation and to stimulate growth in the Eurozone.

Unfortunately, while a cheaper Euro will benefit the export-led flexible German economy it will not tackle the regional disparities in the purchasing power of the currency. For example, in Italy, the trend weakening in the Euro was reversed in July and the Italian’ Euro’s overvaluation against the US dollar in PPP terms has risen to reach 12.5% in September with a nominal exchange rate of 0.76 to the US$ compared to a World Price Index rate of 0.86. With the Italian economy in recession and the French economy weak, if these countries do not respond positively to monetary stimuli alone, which is unlikely because of inherent rigidities, internal and external prices will move further out of kilter outside of Germany. The WPI indicates that the pressures on the single currency will intensify.


 






















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
335 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
336 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
473 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
473 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
626 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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