Undoubtedly, when people expect falling prices, they become less willing to spend and therefore less willing to borrow. Moreover, if consumers become less willing to borrow, hence they become less willing to spend. We can call it the “depressing effect of raising debt burdens on spending and consumption”. In simple words, that is a deflationary trap. Another huge concern is that wages have to fall but management knows well that it is not a cakewalk to cut nominal wages.
Since January 2016, oil prices have fallen considerably so that shocked analysts became obsessed with deflation. In addition, many economists criticized Fed’s decision to embark on monetary tightening in December.
However, this time Fed’s forecasts may prove to be true. Some data seem to justify Fed hawks’ opinions about the future. Inflation has eventually begun to stir. For instance we can look at the data provided by the US Bureau of Labor Statistics on the US Core Inflation rate.
Since January 2016, oil prices have fallen considerably so that shocked analysts became obsessed with deflation. In addition, many economists criticized Fed’s decision to embark on monetary tightening in December.
However, this time Fed’s forecasts may prove to be true. Some data seem to justify Fed hawks’ opinions about the future. Inflation has eventually begun to stir. For instance we can look at the data provided by the US Bureau of Labor Statistics on the US Core Inflation rate.
As we can see from the graph above, most recent inflation rates are now running close to or above 2 per cent. There could be greater room for widened optimism and Fed would be finally able to hike rates without any serious difficulties.
In conclusion, what we should really worry about are bearish expectations. Deep pessimism has been pervading financial markets despite the resilient recovery from the 2008 crisis.
There are good reasons to expect inflation rate increasing in the short term in the US. According to data, labour market is now returning to full employment rate estimate, and this is a good sign according to Phillips model. In addition, daring and unconventional policies like quantitative easing are now proving to work effectively. Ultimately, no one would bet that commodities’ prices would remain steady low over the next centuries. Inflation will definitely stir but there is no evidence that it will do so at a savage rhythm. Even the more risk-averse investors could be positive about their projects. Growing inflation will do us no harm for sure. It can only be an encouraging stimulus for economy.
Few weeks ago Nobel-Prize winning economist Paul Krugman reassured: “No, 4 percent inflation wouldn’t turn us into Zimbabwe. I remember when we had stable inflation of around 4 percent – and it was morning in America.”
Nicola Maria Fiore