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We have long been arguing that all the monetary stimulus from central banks around the world would ultimately spark inflation and only happenings that have been encountering such is lower commodity prices.
We believe, while central banks are totally hooked to bringing inflation back, reflation poses one of the biggest risks for financial markets as well as global economy.
With inflation returning, most of the central banks with their large balance sheet may not be in a position to hike rates that would not destabilize financial markets as well as economy. Global central bank balance sheet size is on its way to reach $30 trillion. So reversing the gear will not be an easy job. In such case greater risks include -
- Overshooting of inflation, including commodity prices.
- Bond market turmoil, due to rapid rise in rates.
- Biggest economic risk is stagflation - return of inflation without reaching desired growth rate
With inflation rising, central banks around globe will have lesser firepower to boost economy.
US core inflation is now very close to FED's 2% target, inflation for sticky items are already over 2% range. Wage growth have also started to pick up pace with tightening in labour market. In January, wage growth in US was up 2.5% from a year ago. And this early jitter of inflation isn't just in US but many places across globe. Headline inflation in Canada, picked up sharply from just about 1% in last October to 2% in January this year.
One of the reason is, oil and commodities price drop is unlikely to bear much effect in 2016, due to lower base effect. So any rise in oil price from now on could boost inflation sharply.
One of our top concern is bond market, where purchase by central bankers have skewed yield towards low. Now with inflation returning, yields could rise sharply with at one hand investors looking for extra to compensate for inflation and central banks start reducing accommodation on the other.
We, at FxWirePro, recommend at this stage buying into inflation protected securities such as TIPS or invest in gold which nicely compensates for inflation.
