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The World Price Index

Released: January 10, 2017
Brazilian Real Continues to Regain Strength as the Latin American Economy Starts to Rebound
  • Brazilian Real rises by 6% to overvaluation of 14%
  • German Euro falls to 17% PPP undervaluation
  • Sterling drops back to 12% undervaluation with the US Dollar

The World Price Index (WPI) data for January has shown a sharp rise in the value of the Brazilian Real, in its fundamental rate of valuation, against the US Dollar in purchasing power parity (PPP) terms. In the Eurozone, strains continue to pull at the seams of the single currency in terms of heightened differences in the fundamental value of individual members. Sterling has weakened against a strengthening dollar.


Real strengthens
The Brazilian Real has risen by nearly 6% in January, to an overvaluation of 14% against the dollar in PPP terms. In the foreign currency markets, one dollar bought Real 3.22 this month, compared to Real 3.42 in December. In contrast, the WPI rates were one dollar to Real 3.67 in January as against Real 3.71 the previous month.

The Brazilian currency has been steadily strengthening in PPP value as the reputation of the governor of the Banco Central do Brasil, Ilan Goldfajn has risen. Instead of cutting rates quickly to stimulate the weak Brazilian economy, he only recently began a slow pace of monetary easing cutting the Selic rate modestly by 25 basis points each time at the end of October and November and it is now at 13.75%. The monetary easing caused a dip in the overvaluation of the Real in PPP terms in December, but it is now back to the level achieved in November 2016 after a failure to lower rates again in December. The caution stems from the remaining existence of inflationary pressures especially as the Brazilian economy appears to be showing signs of growth after a long recession. At the end of last year the IMF predicted that growth in output would be 0.3% in 2017 after falling by 3.3% in 2016. The most recent World Economics Sales Managers Index (SMI) for Latin America picked up green shoots of recovery in a region dominated by Brazil.

              
Euro Weakens on Dollar strength
The combined effects of the impact of the election of Donald Trump on long-bond yields in the US and the loose monetary policies of the European Central Bank, pushed the Euro-Dollar exchange rate closer to parity in January. In foreign exchange markets, one dollar bought €0.95 while the average WPI rate based on the countries surveyed was one dollar to €0.89 implying an overall undervaluation of 6.7% in December.

The advantage of the WPI methodology, is that it allows estimates to be made of the fundamental over and under valuation of the countries comprising the Eurozone. Underneath the average data, the strains on the system remain evident with the German Euro falling by 2%, to an undervaluation in PPP terms of nearly 17% against the dollar while a French Euro was overvalued by nearly 5% against the dollar in PPP terms. A Greek Euro was overvalued by 7%. The Italian Euro fell by 4%, to a PPP undervaluation of 7% on political instability after last month’s referendum. German exporters remain the beneficiaries of a system that is causing stagnation and unemployment in the rest of Europe.

Sterling weakens
Sterling fell back again in January, weakening by a further 2% to an undervaluation of 12% against the dollar in PPP terms, but the fall still keeps Germany more competitive by 5%. The foreign exchange rate had one dollar buying £0.81 in January against a WPI rate of £0.71.


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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