Wednesday, January 7, 2015

Do US and EU inflation attitudes differ? | Fed on the cusp of interest rate rises

ECB president, Mario Draghi, has received news that, on past indications from him, will have come as an unwelcome New Year’s present. Euro area inflation for December became negative, and that is official (see yesterday’s Eurostat news release above). A rate of inflation that is below zero is one definition of deflation, the ECB’s long-time bugbear.

In this, Senor Draghi and his colleagues are very much in a minority. Given that this phenomenon is down to one single factor, the precipitate drop in the price of oil and therefore of energy, it is bringing comfort to consumers, manufacturers (just so long as they are not making products for the oil and gas industries), and governments (particularly those of a German persuasion).

Fed on the cusp of rate rises

Even in the USA, there is clear evidence that the authorities there are more sanguine about the situation, which is global in nature. An extract from the minutes of the most recent Federal Open Market Committee (FOMC) meeting, released last evening (GMT) states that:

“With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time”.

This is notable even if US inflation is not as low as that pertaining in the Eurozone. It is still very low by historical standards.

Normalisation refers to the process of commencing core interest rate rises in the USA. We now even have a clear timeline for this. Again, from the minutes:

"…most participants thought the reference to patience indicated that the Committee was unlikely to begin the normalization process for at least the next couple of meetings."

Some economic commentators are using this to calculate that such rises will begin as early as April of this year. That is not that far away.

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