All eyes have been on the yield curve and what it means for growth, but what about inflation and the fact that it is undershooting central bank targets?
In the US, the core Personal Consumption Expenditure Index , last week came in at 1.8% for January, its weakest level in 11 months. The annual change in the headline Consumer Price Index, meanwhile, was 1.5% in February, down from 1.6% in January and much lower than its 2.2% in February 2018. This steady deceleration in the annual rate of increase in consumer prices has been a concern for the Fed, so much so that Fed appears open to the rate of inflation going above its targeted rate of 2%.
Another is that the decline in unions’ influence on wage-setting, especially with the rise of the sharing economy, where employees tend not to be members of unions. It is a precarious balance that monetary policy authorities will have to navigate. They are not even halfway through quantitative tightening, with global interest rates at historic lows. All while the Fourth Industrial Revolution has already begun to disrupt the cost of labour, the cost of capital, productivity and consumer demand — all critical ingredients in the way pricing works throughout economies.
Is it stagflation — a slow and steady walk into sinking sand that, before we know it, we find we’re stuck? How would monetary policy get us out of that with interest rates at historic lows? Japan has struggled for almost three decades and that’s why central banks are so loathe to wind down their balance sheets, which would leave them with very little firepower at all.
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