Is the Inflationary Beast Set to Rise?
Financial Markets have not had to deal with rising inflation for the better part of a decade.
Is this about to change? Should we be concerned?
Inflation can decrease a consumer’s purchasing power. However, a certain level of inflation can be a sign of a strengthening economy, and can generally be absorbed. So long as the inflation can be offset by rising wages. More on that in a moment.
There are several measures governments and central banks use to monitor inflation. The main one is the Consumer Price Index (CPI) which measures the change in prices paid by consumers for goods and services.
The Producer Price Index (PPI) is also watched by the U.S Federal Reserve. The PPI measures prices from the seller’s point of view.
Around the world we’ve seen several other inflationary indicators.
Commodity prices are starting to edge higher.
Last year the Reserve Bank of India dropped its easing bias.
And Mexico’s Central Bank raised its rates to 8 year highs in an attempt to stabilise its chronically weakening currency.
However, wages appear to be the anomaly. Wages have been stagnant in most global economies.
Yet it is this important variable that may be starting to stir. Wage rises could spook markets from an inflationary perspective, if they haven’t already.
Many believe the recent sell down in stock markets across the world, led by the U.S, was due to fear of rising inflation.
Remember; economic reports lag real time, whereas stock markets are forward-looking beasts.
If inflation does start ticking higher, then Central Banks will have no option but to act on interest rates.
U.S markets have risen strongly since 2009 off the back of historically low inflation, historically low interest rates and low wage growth.
So the question now is whether all this is about to change?
On 2nd February the U.S Government’s monthly employment report for January revealed that wages had posted their largest annual gain in over 8 years. This suggests their economy could be getting close to full employment, and the ‘Inflationary Beast’ may be ready to come out of its extended hibernation.
How cranky and hungry it is going to be remains to be seen!
Stay true to your systems and good luck with your trading.
