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 socialism – shareholder capitalism is delivering
Economy

Forget socialism – shareholder capitalism is delivering

Many Millennials say they would prefer to live in a socialist society. That's understandable. But while socialism promises everyone ownership and powe…
3 Dec 2021
In praise of capitalism, the noble path that leads to profits
Economy

In praise of capitalism, the noble path that leads to profits

Contrary to modern myth, profits are not always a result of greed, but a signal of virtue. Stuart Watkins reports.
3 Dec 2021
It’s official – inflation is no longer transitory
Inflation

It’s official – inflation is no longer transitory

America’s central bank has had a change of heart on inflation, and wants to retire the word “transitory”. John Stepek explains what that means for mar…
1 Dec 2021
What the Omicron variant means for your money
Investment strategy

What the Omicron variant means for your money

The Omicron variant of Covid-19 is panicking the markets. Will we see a new lockdown? What does it mean for the economic recovery, for inflation and f…
30 Nov 2021

Most Popular

Three safe bets on the growing online gambling sector
Share tips

Three safe bets on the growing online gambling sector

Professional investor Aaron Fischer, creator of the Fischer Sports Betting and iGaming ETF, picks three of his favourite online gambling stocks.
29 Nov 2021
Making sense of the new minimum pension age rules
Pensions

Making sense of the new minimum pension age rules

The rules surrounding the minimum age at which you can start tapping into your retirement savings have been tweaked, but are still confusing. David Pr…
23 Nov 2021
Bubbles grow in global property markets as house prices continue to rise
Property

Bubbles grow in global property markets as house prices continue to rise

House prices grew by 6% in the year to mid-2021 in 25 global cities, with the German property market in particular showing signs of overheating.
3 Dec 2021