Features

Inflation will surprise investors

Central banks have revised down their inflation expectations. But the current subdued rate may not last.

940_MW_P05_Markets

"Central banks are no longer afraid of inflation," says Andreas Neinhaus in Finanz und Wirtschaft. The European Central Bank (ECB) has revised down its inflation forecast and moved a potential date for the next interest rate hike to next year. The US Federal Reserve no longer intends to raise interest rates this year and has signalled that it will stop its quantitative tightening (QT) programme, whereby it withdraws liquidity from the system, later this year.

The Bank of Canada has also decided to keep rates steady for the time being. Increasingly doveish central banks have contributed significantly to this year's stock market rally, says Neinhaus. But is the subdued rate of inflation likely to last?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Looking the wrong way

A fall in the oil price late last year has subdued the pace of price rises. But as Morgan Stanley points out, oil has recovered in recent months, while last year's drop will soon fall out of the annual comparison. China is recovering slowly, as Beijing has injected new rounds of stimulus into its economy, so global growth should strengthen.

Most significantly, wage growth continues to strengthen across the major economies. In Germany, wages grew by 3.1% in 2017. That's the highest rate since 2011, as the Frankfurter Allgemeine Zeitung points out.

Advertisement
Advertisement - Article continues below

In the US, hourly pay rose sharply in February, pushing the wage increase over the past year to a ten-year high of 3.4%. Economists expect wages to keep rising gradually, even if hiring slows from the current rate of nearly 200,000 a month, says Jeffry Bartash on MarketWatch. Wages are growing not just in the US, but also in Europe, Canada and Japan.

In the long run, higher wage growth should force inflation up as pay increases stimulate demand, pushing up prices, in turn leading to more wage increases, and so on. So inflation "might have bottomed out", says Finanz und Wirtschaft. Investors and central banks counting on inflation easing may be looking the wrong way.

If inflation does rise, interest rates may have to go up in response, and faster than expected if central banks fall behind the curve. That spells bad news for equities but bodes well for gold, which does well when investors get nasty surprises. It is also an excellent store of value, so the return of inflation is another reason to expect it to shine.

Advertisement

Recommended

Visit/520584/weak-inflation-data-may-gives-the-bank-of-england-an-excuse-to-cut-rates
Economy

Weak inflation data may gives the Bank of England an excuse to cut rates

UK inflation is edging lower, and is now well below the Bank of England’s 2% target rate. That could mean even lower interest rates. Here's why. 
15 Jan 2020
Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/509411/inflation-little-changed-in-may
Economy

UK inflation little changed in May

The inflation rate in the UK was little changed in May, compared to last month. Here, John Stepek looks at what's been happening to prices in the UK.
19 Jun 2019
Visit/506085/get-set-for-an-inflation-scare
Economy

Get set for an inflation scare

Investors are getting complacent about inflation. They should prepare themselves for a fright.
3 May 2019

Most Popular

Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020
Visit/investments/property/600826/living-on-a-houseboat-the-pros-and-cons-of-a-floating-home
Property

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020