Will turmoil in the Middle East trigger inflation?

The risk of an escalating Middle East crisis continues to rise. Markets appear to be dismissing the prospect. Here's how investors can protect themselves.

If you read the financial news this week you will see that everyone is talking about interest-rate cuts. The most prominent discussion on this topic is in the US, in the run-up to the election. Supporters of the Democratic Party have been crying out for the US Federal Reserve to lower interest rates, and at the end of September, the Fed obliged, handing the incumbent party a large 0.5% decrease in borrowing rates. Whether this will feed through to the economy by election day is doubtful, but it certainly gives those looking to take out mortgages in the near future some economic hope.

Now “lower-rate fever” is spreading to Europe. In this case, politics are not playing a leading role in the debate. Rather, technocrats and investors want to get back to what used to be called the “new normal”, but which is starting to feel like the old normal: stagnation, permanently low rates, and occasional bouts of monetary easing. Clearly both the technocrats and market participants have realised over the past few years that although economic stagnation and low rates might not be optimal, they are preferable to economic stagnation, inflation and interest rate hikes.

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Philip Pilkington is a macroeconomist and investment professional. He is the author of the book The Reformation in Economics, and blogs at Fixing the Economists and on Twitter @philippilk