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The World Price Index

Released: August 12, 2014

China’s Yuan at lowest valuation for 21 months against the US Dollar

  • Argentine peso overvaluation falls after default
  • Rouble still overvalued despite ongoing sanctions.
  • Italian euro hits 11% overvaluation.




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.


China Yuan / Renminbi
World Price Index in August reports that the undervaluation of China’s currency has increased sharply from 6.9% in PPP terms in July to 9.8%. The market Yuan to dollar exchange rate was 6.17 compared to an estimated PPP rate of 5.56, the third month in which the Yuan has depreciated against the US currency. This will fuel the widely held concern in the US that the Chinese authorities are deliberately keeping the currency undervalued to please Chinese exporters. Research derived from the World Economics China Sales Managers’ Index (SMI) in July found that 19% of Chinese Business polled agreed that the value of the currency was harming their sales.


Argentine Peso
Measured by the World Price Index the relative overvaluation of the Argentine peso against the US Dollar in August has dropped by 4.7% on its value in July. The World Price Index indicates a PPP rate of 10.14 pesos to the dollar compared with the official rate of 8.25, indicating an overvaluation of 22.9%. The unofficial ‘blue’ market rate closed at 12.70 on August 5 reported by the Buenos Aires Herald, suggesting that the official rate is actually 54% overvalued. While the WPI is based on an estimate of the long-term equilibrium value of the Peso based on relative prices, the ‘blue rate’ has reacted to the negative impact of the country’s second sovereign debt default on market sentiment about the Peso’s future path.


Russia Rouble
The Russian Rouble remains overvalued by 1.7% against the US$ based on August WPI data, down from 2.7% in July. The World Price Index Rouble PPP value is 36.4 compared to a nominal exchange rate value of 35.79. The worsening Ukraine crisis and the tightening of US and EU sanctions against Russia in the recent weeks suggests that the Rouble should move towards, or even below, the WPP Dollar rate in the short-term. In contrast, the Rouble is being buoyed by the potential for further rises in oil prices caused by instability in Iraq and Libya. This is reinforced by a further tightening of Russian monetary policy as a result of the Central Bank raising its interest rate by 0.5% to 8% on July 25.


Eurozone
The Eurozone has large internal inconsistencies due to the wide variation in the purchasing power of the currency within the Eurozone. For example, the Euro in France is overvalued by 31.1% in relation to the US Dollar. In contrast, the Euro in Germany is only overvalued at 10.2% on the same measure.

The Italian’ Euro’s overvaluation against the US dollar in PPP terms has risen by 2.8% to reach 10.6% in August with a nominal exchange rate of 0.75 to the US$ compared to a World Price Index rate of 0.82. The Italian economy has experienced two quarters of negative growth in 2014, which should put pressure on domestic prices levels in future, if the overvaluation trend is to be reversed.

These inconsistencies within the Eurozone inevitably impose great strains on some members of the currency union. The ‘Single Market’ concept clearly is still some way from reality.


 



















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
309 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
309 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
447 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
447 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
600 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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