Inflation’s alive and well in America

Strip out volatile food and energy prices and America's inflation is up 2.2% year-on-year, the fastest rate since the summer of 2012.

782-inflation-634

Inflation is about the last thing on investors' minds right now. The market scare over global growth, along with the tanking oil price, has fuelled fears of deflation, and expectations of interest-rate hikes have receded ever further into the future.But not for the first time, markets may be looking the wrong way.

In America the annual rate of consumer price inflation is 1.4%. That doesn't exactly scream Zimbabwe, but underlying, or core, inflation which gauges domestic inflationary pressure is surprisingly firm. Strip out volatile food and energy prices and inflation is up 2.2% year-on-year, the fastest rate since the summer of 2012. Inflation is "alive and kicking", says Omair Sharif of SG Americas Securities.

The growth outlook is solid, as the healthy labour market and lower energy prices should fuel consumption, which comprises two-thirds of GDP. The impact of previous falls in the oil price will also fade from the annual calculation of inflation over the next few months.

The central bank is unlikely to hike interest rates in March, but "we will look back and say that [it] made a mistake", says Stephen Stanley of Amherst Pierpont Securities. The Fed falling behind the curve, necessitating steeper hikes later to knock inflation on the head, implies potentially heavy turbulence in overpriced debt markets. And it's not just America.

Global core inflation has reached 2.4%, its highest level since 2000 (except for a brief period at 2.5% in the autumn of 2008). This is due largely to sticky inflation in emerging markets. JPMorgan thinks global headline inflation will bottom at 1.5% in June this year before recovering to 2.6% by December. Take the deflation scare with a pinch of salt and hold onto your gold.

Recommended

Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Will America’s “healthy reflation” end in inflation?
US stockmarkets

Will America’s “healthy reflation” end in inflation?

Democratic control of the US Congress would give Joe Biden huge scope to stimulate the economy. But willie mean a “healthy reflation” for the economy …
8 Jan 2021
23 December 1913: The US Federal Reserve is created
This day in history

23 December 1913: The US Federal Reserve is created

After much debate, Woodrow Wilson finally signed the bill that would create the US Federal Reserve on this day in 1913.
23 Dec 2020
The return of Janet Yellen
People

The return of Janet Yellen

Janet Yellen, the former US central-bank chief is back, this time as US Treasury secretary. Donald Trump wondered whether she was too short for the jo…
19 Dec 2020

Most Popular

Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Free 6 issue trial then continue to