BUSINESS MAVERICK ANALYSIS: The economic future: Inflation, Deflation or Stagflation?

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Financial markets are starting to price in the prospect of inflation, but deflation still remains a risk and the outside view is that we may be heading for stagflation. There are likely to be many surprises along the way before we are able to make a definitive call on which of the greater evils, if any, is most likely.

Unexpected increases in inflation in the US and the UK, along with a record high nominal gold price, have put the prospect of inflation – and, for some, even stagflation – back on the table for economists, market analysts and central banks.

The rise in the core inflation rate was even more significant, as highlighted in the graph below, with the measure of inflation that excludes food and energy experiencing its largest increase since 1991. Recovering oil prices contributed about 25% to the monthly increase in the core inflation rate. Other categories that increased included goods that benefit from a reprieve from the lockdowns: rents, new and used vehicles and apparel.

retreat. The most-anticipated outcome of the meeting is expected to be a change in the US central bank’s monetary policy framework, which could see the Fed target an average inflation rate of 2% going forward. He asserted: “Even now, at this very difficult time for the economy, we can see the inflation-targeting framework functioning properly, delivering historically low interest rates in the context of low inflation. With inflation well anchored, moves to lower interest rates should get us more real growth than inflation. And this is exactly where we are now.”

He adds that if deflation were to take root, the bank would deploy all the tools at its disposal to maintain inflation in its 3% to 6% target range.

 

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