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The World Price Index

Released: December 9, 2014

Continued Eurozone deflation in January pushes German Euro to -5% valuation against the US Dollar

  • More Euro weakness expected as Central Bank gets ready for bond buying programme
  • Russian Rouble falls to -38% valuation
  • Canadian Looney approaches parity with 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.


The Euro
In January, the PPP values of the main member countries of the Eurozone fell sharply. The value of the German Euro crossed the line from close to parity with the US$, an overvaluation of 1.1% in December to an undervaluation of 4.6% this month. The World Price Index (WPI) German Euro’s PPP value is 0.80 to the US$ compared to a nominal exchange rate value of 0.84. The Italian Euro also fell over the month significantly from an overvaluation of 12.6% to 3.3% in January. The French Euro fell by 7.4%, but it still remains stubbornly overvalued at 18.1% against the US Dollar. The WPI PPP value of the Euro in France, based on internal prices in the country is 0.99 to the dollar compared to a nominal exchange rate of 0.84.

The methodology behind the WPI involves collecting price data across different countries which allows the measurement of the PPP value of Euros across the different Eurozone members. Changes in the PPP value of a country or currency bloc each month provides an indication of the extent to which internal prices are adjusting within the different members of the Eurozone. The sharp changes in the WPI this month reflect two factors: the continuation of deflationary pressures in the main countries and a sharp fall in the value of the euro against the dollar.

The nominal exchange rate has fallen steadily from 0.73 Euros per Dollar in July 2014 to 0.84 in January, a depreciation of 13%, but the Euro fell sharply in the New Year as a result of renewed fears of a Greek exit from the currency union. The sharp fall in the relative value of the Euro may be good for German exporters, but it highlights the dangers of deflation in the highly indebted countries such as France, Italy and Spain. The CPI for December showed a fall of -0.2% and January’s WPI data gives an advance warning that this trend is continuing in January.

The challenge facing the European Central Bank (ECB) this year is to ease monetary policy in order to inflate the European economy while maintaining internal stability within and between member countries. The ECB, which has been following a low interest rate policy for some time, is due to decide on whether or not to undertake a project of quantitative easing at its meeting on January 22. If it decides on a major sovereign bond buying programme at the meeting the Euro will continue its fall relative to the dollar, but the fall in the PPP value of the French Euro will have to continue at a faster pace to prevent instability and rising real debt in that country.


Russian Rouble
The plunge downwards in the relative value of the Russian currency against the dollar has continued into the New Year. As measured by the WPI in January, the Rouble was undervalued by 38.3% against the US$. The PPP value for the Russian currency was 36.88 per US$ compared to a nominal exchange rate value of 59.83.

There has been no abatement in 2015 of the two forces driving the currency downward: distrust in Russia’s foreign policy and the continuing fall in the price of oil. On January 6th the price of Brent crude oil fell below US$50 per barrel for the first time since May 2009. The Russian authorities have done all they can to slow the decline in the value of the currency apart from formal capital controls. The central bank pushed up interest rates by 6.5% on December 16th to reach a high of 17% while spending an estimated US$70 billion in reserves buying Roubles last year. The country has now run out of options and the prediction for 2015 is a deepening recession, further falls in the PPP value of the currency, a downgrade in the rating of Russia’s debt with a rising risk of another sovereign default.


Canadian Dollar
The World Price Index in January reports that the Canadian dollar is approaching parity with the US$ with an overvaluation of only 1.8% in PPP terms compared with an overvaluation of 6.6% the month before. The currency weakened following a statement by the Bank of Canada declaring that the currency was overvalued, but falling energy prices are also taking support away from the Looney. The Bank was concerned that a high dollar was harming exports while suppressing inflation.


 
















































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
472 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
473 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
610 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
611 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
763 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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