Thursday, October 15, 2015

Economy: Inflation - Downward Pressure? What Downward Pressure?

(Drivebycuriosity) - Last month the Fed refused to hike their interest rates. The authority saw a risk that the additional downward pressure on inflation from lower oil prices could persist.

In the moment of writing oil (brent crude, the international oil gauge) costs $49.30, about $3 more than at the low from January ($46.59). So, since January oil didn´t get any cheaper! The downward pressure had already disappeared in the recent months (finanzen). OPEC claims that the global oil demand is rising and we read reports that the US oil production started to fall. I think that the zero interest rate policy is also stabilizing the price of oil because hedge funds and other speculators are using the cheap money to buy oil futures on the financial markets.

The core inflation rate (without food & energy) is 1.9%. But it is likely that this rate will go up because the labor market is tightening. This morning we learned the US jobless claims fell on 42 years low (bloomberg )! It is likely that in the coming months the tightening labor market will drive wages and therefore labor costs upwards which should translate into higher prices for services and labor intensive goods. And we are already experiencing rapidly climbing rents and health care costs. Zero interest rates for too long could lead to an overheating labor market and push the core inflation rate higher.

It seem that the Fed made a mistake in September because their members underestimated the growing inflation risk. I hope they will correct their mistake at the next meeting at the end of this month and hike the interest rate.

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