Forex Market Commentaries - Is Inflation Sneaking In The Back Door

Is Inflation Sneaking In The Back Door?

Mar 9 • Market Commentaries • 719 Views • Comments Off on Is Inflation Sneaking In The Back Door?

The most recent inflation report carried confused signals: a reasonable rate of inflation for the moment, but ill-omened evidence of pressure from oil costs. The U.S. Bureau of Labor Statistics claimed that inflation for the month of Jan was 0.2 %. There are bad and good sides to this: 0.2 % is a reasonably moderate rate of monthly inflation, although it was the highest inflationary rate in 4 months.

The issue is, after almost no rise in the Consumer Price Index (CPI) in quarter four of 2011, is inflation beginning to return?

Rising inflation would be a problem for the economy generally, but particularly it might threaten individuals that are reliant on interest revenue from savings and money market accounts. Inflation can hurt them immediately in several ways, in short and longer terms.

The mild inflation of recent months has brought year-over-year inflation back below 3 % for the first time since early 2011. Nevertheless with Federal Reserve policy targeted on fast expansion, makes inflation is a real challenge as it can pique up at any time.

What could push inflation higher is the rising cost of petrol products. The cost of a barrel of oil has risen back above the $100 mark.  Overall, energy rose 12.1 % during the last year, and petrol jumped 9.7 %. Oil costs also made a run at this time last year and might have been the cause for slowing the economy in the months that followed.

Will History Repeat Itself?
While inflation costs all consumers, it is particularly hard on people who rely on money market and deposit accounts for earnings.  The instant effect is a loss of buying power. Inflation for January could be considered moderate at 0.2 %, but that single month’s worth of inflation will wipe out a year’s worth of interest at today’s average savings and money market rates.

 

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Likewise, even with inflation slipping below 3% for the previous year, that’s still enough to result in a loss of 2 % or even more in buying power for savings and money market accounts. That is the “now” effect. The “later” effect comes from the harm inflation could play in keeping savings and cash market rates down in days to come.

Under standard circumstances, rates would adapt to the level of inflation, but given the current economic conditions, rates have stayed low despite inflation.

If rising costs slow the economy just as it appeared to be improving, it might likely mean an even longer wait as the Fed’s will keep interest at record low rates. Employment has been the key economic indicator to look at in the last few months, and based on today’s employment release, jobs are being created.  All eyes will be focused on crude oil and bringing the costs down.

This might even spark the Obama administration to slowly release crude from the Strategic Reserves, as the economy cannot absorb high energy costs and continue to grow. With new jobs being created, interest rates low, the Administration now has to look at the Trade Deficit, which was also released today showing a larger deficit than expected, which can be partially blamed on the costs of imported petroleum products. Price pressure from that sector may be a drag on employment and on growth and expansion generally.

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