World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data


The World Price Index

Released: November 11, 2014

WPI shows Japanese Yen fast approaching parity with the US$

  • Bank of Japan quantitative easing policies result in drop to 3.4% overvaluation
  • Brazilian Real continues fall to 17% overvaluation
  • Russian Rouble hits 20% historic undervaluation




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.


Japanese Yen
The World Price Index in November reports that the overvaluation of the Japanese currency in PPP terms has continued its decline and is now approaching parity with the US Dollar. The overvaluation of the Yen fell from 5.7% in PPP terms in October to 3.4% in November. The market Yuan to dollar exchange rate was 113.2 compared to an estimated PPP rate of 117.1. The Japanese currency has now steadily dropped from an overvaluation in PPP terms from 59% against the Dollar in January 2013 to its current level.

One of the main reasons for this dramatic fall in in the Yen’s value has been the deliberately loose monetary policies of the Bank of Japan. The central bank’s quantitative easing stimulus which was agreed in April 2013 has reduced the value of the Yen sharply and pushed up the domestic stock market, but it has had little impact on GDP growth and inflation expectations. As a result, on October 31, surprising markets the Bank of Japan decided to raise its monetary base expansion by ¥10-20 trillion from the ¥60 trillion target already in place. This rise in the money supply means that the currency will continue to fall in the coming months against the dollar in nominal and in PPP terms, but it will also result in disquiet in central banking circles in China and Korea as a result of the threat of a beggar-thy-neighbour currency war if the Yen falls much below PPP parity with the dollar.


Brazilian Real
Measured by the World Price Index the relative overvaluation of the Brazilian Real in PPP terms continued its decline falling to an overvaluation of 17.4% in November. The WPI indicates a PPP rate of 2.92 to the Dollar compared with a nominal exchange rate of 2.48. This is the second month that has seen a sizeable fall in the value of the currency which stood at a relative PPP overvaluation of 35.3% in September 2014.

The recent decline in the currency’s nominal value was due to investor disappointment at the re-election of President Dilma Rousseff which promises more of the same in economic policy. In effect this means a cautious approach to cutting public expenditure leaving a stagnating economy and a depreciating currency as the only factors able to correct the size of the country’s widening current account deficit.


Russia Rouble
The Russian Rouble continued its plunge against the US$ in November as shown in the latest WPI data. The currency fell in PPP terms from an undervaluation of 10.9% last month to 20.0% in November, a new historic low. The World Price Index Rouble PPP value is 34.80 to the US$ compared to a nominal exchange rate value of 42.48.

The fundamental political reasons stemming from the Ukraine crisis for the currency’s fall have been well addressed, but on November 5 the Russian Central Bank dramatically reduced its expensive and increasingly ineffective intervention in foreign currency markets that had been supporting the Rouble. The Bank’s intervention which averaged around US$ 3 billion per day in October will be cut back to US$350 million per day. The announcement produced a 3% drop in the nominal value of the currency against the US$. The move followed a tightening of Russian monetary policy when the Central Bank increased its interest rate by 1.5% to 9.5% on October 31, but the tightening failed to stop the fall in the currency’s value. With prices rising and the Rouble effectively in free float the only way to restore the currency to PPP parity will be downward pressure on Russian wages and prices produced by an economic contraction.


 


























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
405 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
406 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
544 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
544 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
696 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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