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The World Price Index

Released: March 14, 2017

Deep Fissures Within the EuroZone Widen Further 
  • German / Greek valuation spread widens to 28%
  • German / French valuation spread remains stable at 21%
  • Eurozone Consumer Price Inflation accelerates to 1.8%

The internal stresses within the Eurozone continue to plague the economies of the less competitive countries. Greece and France in particular continue to suffer badly from the divergence in external and internal price relatives. The overvalued Greek Euro (in internal price terms) compared with the undervalued German Euro (see Chart opposite) are now some 28% divergent.


Franco German spread at 21%
In March 2017, one US dollar bought €0.95 in the foreign exchange market, but the WPI methodology allows a comparison of the PPP values of a Euro in different countries. This permits an estimation to be made of the internal stresses within the Eurozone. For example, the respective WPI rates for Germany, Spain, Italy and Spain, the four largest Eurozone economies, were one dollar to €1.25, €1.11, €1.09 and €0.99 respectively, arising from differences in competitiveness and differing price levels between the main countries. This means, that German exporters face the advantage of a competitive exchange rate that is undervalued by 15% against the US dollar, while those in France suffer from an overvaluation of 6%: a spread of 21%.

These differentials help to account for the massive trade imbalance between Germany and the world as well as with its European partners. The undervaluation of the Euro stems from the European Central Banks quantitative easing policies, which were aimed at avoiding deflation in the Eurozone by stimulating demand and raising inflation. As a result, the average value of the Euro in March ranged from an undervaluation of 4% to 6% depending on whether country WPI rates are averaged equally or in relation to GDP.


Inflation returns
The ECB’s policies have had an influence on the relative valuation of the Euro in PPP terms. The WPI data shows that there is some evidence that the undervaluation of the Euro has been influenced by ECB money printing in the last few years. The PPP value of the Euro against the dollar has moved from an overvaluation of 19% in January 2013 to its current level of 4-6% undervalued. PPP parity against the dollar was first reached around January 2015 and the currency has continued to remain undervalued since then, with only a few short-lived upward blips.

Unfortunately, while the value of the Euro is too high to stimulate French growth, the undervaluation of German goods has stimulated foreign rather than domestic demand, so the ECB has failed in its aim of trying to stimulate demand-pull inflation. Inflation has been rising nevertheless, as demonstrated by the upward trend in the overall Eurostat Harmonised Index of Consumer Prices (HCIP) in the Eurozone, which has risen from an annual rate of 0.1% in June 2016 to 1.8% in January 2017. Unfortunately, as shown by the World Economics Sales Managers’ Indexes, this is a result of rising prices and expanding growth in China and in the US. The undervalued Euro is importing inflation and if growth does not pick up, the Eurozone will face stagflation: the worst of all worlds.

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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