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The World Price Index

Released: July 12, 2016
German Exports Benefit Most From Euro Valuation

  • Sterling tumbles below fundamental parity rate of £0.77 to £0.72 per dollar
  • Euro valuation: Germany: -12%, France: +10%, Greece: +13%
  • Sterling unchanged from July as undervaluation of 7% to the US dollar continues
  • Chinese Yuan stable at 21% undervaluation
  • Download all WPI data series with monthly updates now

The World Price Index (WPI) data for August illustrates the persistent strains facing French exporters as long as the country remains a member of the Eurozone. Relative German and French price differences show a spread of 22% in competitiveness against the dollar in purchasing power parity (PPP) terms in favour of Germany. Meanwhile, after the Brexit vote, sterling has stabilised at an undervaluation of 7% against the dollar, unchanged on its’ July PPP value. This augurs well for a reduction in the size of the trade deficit between the UK and France and for a growth in UK exports outside of the EU. This spread in Europe between the relative prices of trading partners and the PPP values of their currencies is being mirrored in Asia by the widening gap in the relative value of the Chinese and Japanese currencies which is causing serious problems for the Japanese economy.

Eurozone strains persist
One of the strengths of the WPI methodology is that it allows a comparison of the PPP values of a Euro in different countries. The internal strains of belonging to the Eurozone can then be estimated. In August 2016, one US dollar bought €0.89 in the foreign exchange market, but the WPI rate was one dollar to €0.88 implying an undervaluation of the Euro of 2% in PPP terms. The Euro has steadily weakened against the dollar since WPI data was collected since in December 2012 one US dollar bought only €0.77 against a WPI rate of €0.89.

The Eurozone’s main problem is that while the Euro, as a whole, has approached parity with the US dollar in PPP terms, the divergence in relative competitiveness between the economies comprising the currency bloc have narrowed little. At August’s dollar Euro exchange rate, German prices were very competitive producing an undervaluation of 11.9%, while in France relative prices implied a WPI with an overvaluation of 10.2%. This was only exceeded by Greece with an implied overvaluation of 12.8%. The impact on the economies of southern Europe and France and the Euro’s integrity will only continue as long as Germany is prepared to fund resource transfers to the ailing Euro-members or if they do not leave the currency zone through bankruptcy or the ballot box.

Yen –Yuan 45% Spread
The WPI which is used to estimate the fundamental value of currencies in terms of purchasing power parity (PPP) against the US dollar, provides a useful counterpart to the continually fluctuating relative value of currencies on foreign exchange markets. The data shows that while there has been much volatility between the Chinese Yuan, the dollar and the Japanese Yen in recent years, a significant gap has been building up between market and fundamental values over the last 12 months. This gap existed before, but was less significant while China was growing rapidly.

In December 2012, with Chinese GDP growing strongly there was a valuation gap of 103% between the Yuan and the Yen against the US dollar in PPP terms. As the Bank of Japan’s loose monetary policy succeeded and Chinese growth slowed, this gap steadily closed. By June 2015, on foreign currency markets one dollar bought ¥124.1 against a WPI rate of ¥119 producing an undervaluation of 4%. One dollar bought Yuan 6.2 against a WPI rate of 5.3 producing an undervaluation of the Chinese currency of 14% and a gap of only 10%. In the last year this trend has reversed as the Chinese currency has weakened against the dollar and the Japanese currency has strengthened. By August 2016, the Japanese currency was 24% overvalued and the Yuan was 21% undervalued. This rising spread against the dollar is exacerbating economic problems in Asia’s two largest economies as both economies require weaker PPP rates to stimulate exports and promote growth. China has steadily devalued against the dollar at the risk of large capital outflows leaving Japan with little alternative but to raise the size of its stimulus package risking a proxy trade war through exchange rates.

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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