Thursday, October 8, 2015

Economy: Why The Fed Underestimates The Inflation Risk

(Drivebycuriosity) - Last month the Fed decided not to hike their interest rates. Today the monetary authority explained the decision  (with the so-called Fed Minutes calculatedrisk). Several members of the monetary committee saw a risk that the additional downward pressure on inflation from lower oil prices could persist.

This is ridiculous. Today oil (brent crude, the international oil gauge) costs $53,50, about $9 more than at the low from January ($46.59). So, since January oil didn´t get any cheaper! The downward pressure had already disappared in the recent months (finanzen.).  Instead in the recent days we are experiencing a sharp rally, the price of oil jumped more than 20% from its August low. It is possible that the dovish Fed decision from September and the continuation of the zero interest policy is fueling and encouraging the oil speculation.

 So, the Fed is mistaken, we don´t see additional downward pressure from oil, instead the oil price rise is already adding up to the inflation rate. The core inflation rate (without food & energy) is 1.8%. But it is likely that this rate will go up because the labor market is tightening. Today we learned that the weekly jobless claims fell close to to near a 42-year low,  pointing to ongoing tightening in the labor market despite the recent slowdown in hiring, write Reuters (reuters).

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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