Thursday, June 15, 2017

Economy: Inflation R.I.P.?

(Drivebycuriosity) - It looks like that inflation is dead and buried - at least for a while. In May the US inflation rates went down (inflation). Consumer Prices rose 1.9% (April 2.2% ), the core inflation rate - without energy & food prices - dropped to 1.7% from 1.9%.

It seems that the technological progress is keeping inflation at bay.  Computers and other electronics have been getting cheaper all the time. In many industries are rising labor costs compensated by automation - at least partly. And many consumer goods are kept cheap because Amazon and other E-Commerce companies are getting more & more efficient which translates into cost savings and lower prices. 

Yesterday´s Fed decision to hike interest rates another 1/4 percent point to a range of 1% - 1.25% is also restricting the scope for prices in the near future. The rate hike is a sign that the monetary authority is aware of the inflation risks and ready to work against them.

Inflation is also suppressed by shrinking prices for oil & other commodities. The technological progress is stimulating oil production (for instance by fracking) and curbing oil demand (rising energy efficiency).  Today crude oil costs 8% less than a month ago and average US gasoline prices dropped 5 Cents since last year same time ( I think that the ongoing technological progress will keep oil prices at bay and that oil will stay cheap for a long time.  Cheap energy is curbing transportation costs which influences prices of many goods, including food. So the inflation numbers for June could fall again and should stay low for months to come.

I believe that cheap commodities, E-Commerce & other technologies in combination with a prudent monetary policy will prevent a comeback of inflation for years to come. This is good news for the economy because low inflation rates translate into moderate costs for companies and will leave more money in the wallets of the consumers.  

R.I.P. Inflation

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