Beyond the Numbers: Exploring the Profound Impact of CPI on Your Investments

Good evening, everyone!

I’m excited to join you all here at Diamond Ridge Financial Academy. Together, we’ll dive into innovative investment ideas and strategies. With consistent learning and practice, I hope we can enhance our expertise achieve steady financial growth and ultimately reach financial freedom!

Last night, we discussed the various reasons behind short-term price fluctuations and identified some patterns. For example, when a company’s performance improves beyond expectations, its stock price often sees an upward trend. Similarly, a technical breakthrough in a particular industry can drive the stocks within that sector to rise. Besides these internal factors like earnings and product innovations, external factors such as policies and interest rates also play a role in price movements.  

Although many factors influence price fluctuations, from a technical analysis perspective, prices reflect all market information. This means we can analyze price trends to make smarter investment decisions.

Our chief analyst’s "Price Trend Theory" is particularly insightful. It studies the timing and scope of past price movements to accurately predict future trends. This theory has been integrated into the Quantitative Trading 5.0 system. Using AI to analyze thousands of technical chart patterns, the system significantly improves trading success rates.  

To encourage everyone to explore the quantitative trading system and participate in the AI 5.0 beta testing, our academy has launched a rewards program. By checking in daily for lessons and completing learning goals, you’ll have a chance to win mystery prizes!  

Tonight, I’ll demonstrate how to use the 21 Moving Average as a specific buy signal to help you better understand the principles of the quantitative trading system. Before we dive into the main topic, let’s take a quick look at the market overview.

The UK stock market pulled back today, just as we predicted in our morning analysis. Yesterday, the FTSE 100 saw a strong rally driven by energy stocks but today it dropped as energy stocks declined. Among individual stocks, Antofagasta PLC (ANTO), Glencore PLC (GLEN) and Anglo American PLC (AAL) all experienced losses.  

Our ability to foresee the drop in energy stocks lies in understanding their position as part of traditional industries. With advancements in technology, traditional industries are seeing diminishing growth potential, gradually becoming "sunset industries." For instance, data from Ember shows that wind, solar and hydropower will account for 37% of the UK's electricity this year, surpassing fossil fuels at 35%.  

As reliance on traditional energy decreases, assets in these sectors face a downward long-term trend, with only limited potential for short-term rebounds.

Today, tech stocks also faced some pullback. On one hand, the drop in the FTSE 100 exerted selling pressure on tech stocks as the index is currently near historical highs (as shown in the chart), leading to a technical correction. On the other hand, the US-China trade tensions triggered panic across global tech stocks, amplifying the decline in the FTSE 100.

However, the main factor remains the CPI data. Most investors are taking a wait-and-see approach ahead of the US CPI release, creating a one-sided market that sparked panic selling in some tech stocks. The same sentiment is seen in US stock markets, where investors are waiting for clear trading signals after tomorrow’s CPI report.

Why does CPI have such a big impact on the economy?

CPI is a key measure of inflation, showing how prices of goods and services change over time. Inflation affects consumer spending, as rising prices reduce purchasing power. It also increases business production costs, which can impact profits and slow growth. Together, these factors shape the economy’s overall performance.

For investors, understanding CPI trends is essential. Inflation influences central bank decisions, such as raising or lowering interest rates, which in turn affect global markets and economic stability. CPI is a crucial tool for making sound financial decisions.

From a living standards perspective, CPI reflects average price changes for a basket of goods and services, directly indicating inflation levels. Inflation impacts daily life in several ways, including living costs, savings and spending behaviors.

For instance, when UK CPI rises, prices for essentials like food, energy and housing increase, eroding consumers' purchasing power. Retirees or those on fixed incomes are especially vulnerable, as their real income drops, leading to a lower quality of life. Businesses face higher production costs, which may squeeze profit margins or be passed on to consumers, further driving up prices.

As an example, in 2022 the UK saw rising CPI (as shown above), driving energy prices to soar. High inflation creates economic instability because businesses and consumers can’t predict future price changes. This impacts investment and spending, slowing economic growth. The inflation pressure pushed the Bank of England (BoE) to raise interest rates to control inflation, though it also increased borrowing costs for households and businesses.  

When inflation happens, the purchasing power of currency drops, meaning you can buy less with the same amount of money. This is because inflation raises prices while reducing currency value. Inflation also worsens social inequality. Fixed-income groups lose purchasing power, while higher-income groups can hedge against inflation through investments.

From a monetary policy perspective, central banks use CPI data to guide their decisions. Rising CPI signals higher inflation, prompting rate hikes to curb it. For example, after the pandemic, the Fed printed money to support the economy, causing high inflation. By Jun 2022, US inflation peaked at 9.1%, leading to interest rate hikes to control it. Higher rates increase borrowing costs, slowing growth and impacting stocks.  

When CPI falls, inflation eases and central banks may lower rates to boost the economy. For instance, with global economic struggles this year, central banks began cutting rates. Lower rates reduce borrowing costs, encouraging growth and positively affecting the stock market.

Monetary policy is driven by CPI and other key metrics, impacting credit markets, consumption and investments short-term:  

1. Controlling inflation: Rate hikes make borrowing costlier, reducing consumer spending and business investment. For example, after BoE rate hikes in 2023, the UK housing market cooled significantly.  

2. Economic slowdown risk: Aggressive rate hikes can shrink economic activity. In 2022, both the US and UK faced recession risks from tight monetary policies.

For investors, understanding monetary policy cycles is vital. Defensive sectors (e.g., healthcare, staples) perform better in rate hike cycles, while growth stocks and high-yield bonds benefit from rate cut cycles.

As the world’s largest economy, US inflation has global ripple effects. US CPI data often acts as a global economic indicator, triggering chain reactions:  

1. Stronger dollar: High US CPI and Fed rate hikes attract capital inflows, boosting the dollar. For UK investors, this raises import costs, fueling local inflation. Many countries follow US and UK policy shifts to adjust their own strategies.  

2. Commodity price swings: Most commodities are dollar-priced. A stronger dollar raises global prices, increasing import costs. For example, in 2022, high US CPI drove up global oil and food prices, worsening the UK cost-of-living crisis.  

3. Impact on global policies: The Fed’s tightening often forces other central banks to follow to prevent capital outflows and currency depreciation. In 2022, the BoE’s rate hikes nearly mirrored the Fed’s pace, despite the UK’s slowing economy.  

This shows that U.S. CPI data reflects not only its domestic economy but also deeply influences global markets through the dollar and international capital flows.

How does CPI affect interest rates and stock market fluctuations?

CPI is a key indicator for central banks when setting monetary policy. When CPI exceeds target levels (e.g., the Bank of England’s 2% inflation target), the central bank may raise interest rates to cool an overheating economy. Conversely, if CPI falls below expectations, it might cut rates to stimulate growth.

Changes in interest rates directly impact the stock market. In a high-interest rate environment, borrowing costs for businesses increase, squeezing profits, while investors shift to higher-yield assets like bonds, putting pressure on stock prices. On the other hand, rate cuts usually boost markets by lowering corporate financing costs and encouraging consumer spending.

For example, in 2022, as US CPI data kept exceeding forecasts, the Federal Reserve raised rates multiple times, causing significant stock market volatility, particularly in the tech sector. Similarly, the UK stock market felt the impact, with export-driven companies in the FTSE 100 hit by a weakening pound and sluggish global demand.

Tomorrow’s release of Nov’s CPI data will be critical for Dec’s interest rate decision, especially if the figures show continued inflationary pressure, potentially influencing the Federal Reserve’s decision on rate cuts. According to Wall Street economists, Nov’s overall CPI is expected to rise 2.7% year-on-year, slightly higher than Oct’s 2.6%. Core CPI, excluding food and energy prices is forecast to increase by 3.3% annually, maintaining this level for the fourth consecutive month.

Surveyed US consumers reported rising inflation expectations across the short, medium and long term in Nov, with each term increasing by 0.1 percentage points.

In summary, based on the latest CPI forecasts and Federal Reserve officials’ comments, the market widely expects a high likelihood (around 85%) of a rate cut in the Fed’s Dec meeting.

Rate cuts are generally seen as good news, because they lower borrowing costs, encouraging businesses to invest and consumers to spend, which boosts economic growth. For the stock market, rate cuts usually have a positive effect as they increase corporate profit expectations, potentially pushing stock prices higher. Investors may also favor stocks, driving markets upward.

At the same time, rate cuts often lead to a weaker dollar, benefiting non-USD currencies. This has been one of the main reasons for the recent rise in GBP/USD. Similarly, assets priced in USD such as Crypto and gold, are expected to rally after the data release.

This pullback in tech stocks provides a chance to buy back in. For example, WULF stock is suggested as a buy within the $6.5–$6.8 range.

From a fundamental perspective, CPI and monetary policy are surface-level drivers of prices. Fiat money has no intrinsic value and merely acts as a medium of exchange. To stabilize prices, monetary tools are necessary. For instance, the US government includes gold in its strategic reserves to maintain currency value and control inflation.

Similarly, Anton Tkachev, a member of Russia’s State Duma, recently proposed establishing a strategic BTC reserve to strengthen the country's financial stability. He highlighted BTC's potential as an independent asset unaffected by international sanctions or the inflation risks of traditional currencies like USD, EUR and CNY.

This year’s surge in gold and BTC prices shows their ability to hedge against inflation.

Due to time constraints, this concludes tonight’s session.Tomorrow, I’ll provide a detailed analysis of buy points based on the 21-day moving average. I hope tonight's insights help you understand the essence of currency and seize current investment trends. For those interested in portfolio investments like tech stocks or crypto, please ensure your trading accounts are ready to capitalize on opportunities arising from global economic changes. If you have any questions about stocks, crypto, forex or other specific trading info, feel free to reach out to me.

From tonight’s discussion, please think about:

1. How does CPI data affect investment markets?  

2. What are the underlying reasons for this year’s rallies in gold and BTC?