about 2 months ago • 2 mins
What’s going on here?
The first inflation reading of the year didn’t do much to reset the scoreboard.
What does this mean?
Investors have been tuning into monthly inflation updates as if they were the first episode of a talked-about reality show since a breath-catching cliffhanger. But this one wasn’t quite as satisfying: prices increased by more than expected in December and were higher than in November, reversing the slow retreat of previous months. It’s not a cause for central banks’ concern just yet, though. While higher than forecasted, that figure isn’t alarming. And if you strip out volatile energy and food costs, the remaining “core inflation” was still on the descent.
Why should I care?
Zooming out: Inflation’s a game of chicken.
Inflation is, in part, a self-fulfilling prophecy. Once shoppers realize their grocery shop is running more expensive by the month, they’ll start stocking up to avoid paying more in the future. Problem is, those bulky sales give stores the confidence they need to raise their prices higher. But that shopping tactic mainly makes sense when inflation’s at, say, last year’s 10% peak – save for the pain of storing long-life milk and tinned fish. But when central banks bring inflation closer to their 2% target, even budget-conscious shoppers will be more likely to make peace with paying a few more pennies on that loaf of bread.
For markets: It might not take two, after all.
Central banks might herald 2% as the magic number, but economists seem to be warming to the 5%-mark – roughly where we are today. At this level, interest rates are high enough to make folk and businesses more careful when borrowing money and making business decisions, but not high enough to squash consumer spending or business activity. Plus, keeping rates around 5% gives central banks room to trim them down, a handy tool in an economic downturn.
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