Inflation – Expect the unexpected

The days of worrying about too high inflation were normal for the economy are long gone. This does not mean that the possibility of inflation jumping higher than expected should be completely rejected.

The Bureau of Labor reported today that consumer prices jumped 0.2% in December, below expectations of 0.3% on Wall Street – putting them 2.3% above last year’s levels. Prices (excluding food and energy) – the so-called “core” of the economy, which economists are watching to keep up with inflation, jumped 0.1% in the month.

Since the Department of Commerce’s preferred inflation measure is lower than that of the Department of Labor, inflation is likely to have ended the year again below the 2% target of the central bank. Fed forecasts show that overall they do not expect inflation to reach 2% by next year.

This is a remarkable turnaround given that the unemployment rate, which is 3.5%, is well below 4.1% – a level that the Fed thinks is sustainable. With the traditional, inverse relationship between unemployment and inflation, seemingly disturbed, many officials and economists have also failed with the expectation that inflation will remain constantly cool.

Boston Federal Reserve Bank President Eric Rosengren struck a lone chord in a speech Monday, suggesting inflation remains likely to accelerate. Wage growth, though still moderate, has been rising, he said, and corporate profit margins are under pressure lately, companies’ ability to bear rising labor costs without raising prices may be limited.

Moreover, just because economists are struggling to understand why inflation is so low does not mean that inflation cannot rise. Instead, their struggle to predict inflation may simply indicate that inflation is difficult to predict and may account for something unexpected. In fact, in the early 1960s, inflation was even cooler than it is today. The politicians suggested that this would continue and rather suddenly realized they were wrong.

None of this means that inflation is about to become a big problem, or that projections that it will remain low will not come true. But investors should be open to the possibility that inflation may not do what everyone thinks it will do.

Източник: The Wall Street Journal

Original Post: Expect the Unexpected When It Comes to Inflation

 Trader Aleksandar Kumanov

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