"It's only temporary." At least that’s the story being floated by the head of the Bank of England as inflation came in at 4%, nearly twice as high as the Central Bank’s target, and reached 2-year highs. Any time inflation comes in outside of the government range of 3%, a letter of explanation is required.
However, it appears as though the government is quite content with the state of inflation, as the bank’s claims that a change of policy would disrupt economic recovery have been accepted. It will be interesting to see how high it lets prices rise before taking action, and whether the people of the U.K. will take it lying down.
Inflation in China appears to be slowing, as it reported inflation of 4.9% vs. a market expectation of 5.4%, though it remains questionable whether or not the steps the government has taken to halt the pace of price gains is reliable.
In the eurozone, GDP figures came in slightly lower than expected, which is not seen as a bad thing. Slow and steady growth is ideal at this point. In addition, German economic sentiment figures came in slightly better than expected, which bodes well for the investment climate.
In Japan, the BOJ kept rates unchanged at 0.1% to no one’s surprise, but it raised its economic assessment for the first time in nearly nine months, as exports have risen due to faster global economic growth.
So today is a bit of a mixed bag, with global stocks mixed and commodities higher to start the U.S. trading session.
In the forex market:
Aussie (AUD): The Aussie is mixed this morning, trading higher vs. yen on risk appetite but trading lower against the rest as Asian equities markets were mixed due to an improved Japanese outlook but a slowdown in Chinese inflation. The RBA rate policy meeting minutes showed that the Bank sees subdued consumer spending easing inflation so they did not make hawkish comments about higher rates.
Kiwi (NZD): The Kiwi is mostly lower for the same reasons as the Aussie, and New Zealand’s “younger sibling” status is being highlighted this morning.
Loonie (CAD): The Loonie is higher across the board as commodity money flows make their way from the antipodean currencies to the Loonie. In addition, oil is trading slightly higher.
Euro (EUR): The euro is mostly higher as GDP figures came in slightly lower than expected, showing quarterly growth of 0.3% vs. the expectation of 0.4%. Slower and steady growth may actually be more welcome than faster growth, so this figure is not seen as negative.
Pound (GBP): The pound is higher across the board as indeed inflation came in with a CPI reading of 4%, the highest level in nearly two years. It is apparent that both the Central Bank and the government are on the same page with regard to monetary policy and how inflation should offset the lack of government spending as they pursue austerity, but let’s see if the citizens of the U.K. go along with it.
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Dollar (USD): The dollar is mixed this morning as we await the advance retail sales figures due out later. which will show the health of the U.S. consumer and act as a gauge of economic health, as the U.S. consumer represents some 70% of GDP.
Yen (JPY): The yen is lower across the board as an improved economic outlook and increased manufacturing and exports due to a pick-up in global demand is positive for the economy.
The problem with inflation is that it essentially forces the hand of the consumer and acts as an insidious tax as things cost more. Consumers who were hoping for price drops on things they want or need have to buy now or fear paying more later.
For countries whose economies depend on consumer spending (like the U.S.), if you can’t get people to spend willfully, you force it through inflation.
And that is exactly what governments are trying to do. Look no further than the U.K. and the U.S. One of the problems with this course of action is that the inflation gets exported to other nations around the globe, as both food and energy costs go higher. Look no further than Egypt to see what the real cause of its revolution was.
The other “effect” of inflation is that it allows heavy-debt burdened countries to repay their obligations with currency that is worth less. As prices go up, purchasing power goes down and therefore the currency doesn’t buy as much as it used to, making it less valuable.
So I am keeping my eye on both the pound and the dollar as both governments appear to be willing to allow this to happen. You should as well.