US inflation continues to remain stubbornly high, which has resulted in the repricing of terminal prices. According to economists at TD Securities, while the repricing has hit the CHF (Swiss Franc) and JPY (Japanese Yen) initially, it is expected to be short-lived. The market will be placing more weighting on financial stability rather than price stability for now.
In February, core prices rose at an accelerated pace of 0.5%. As a result, the firmer core CPI (Consumer Price Inflation) reading reflected in another month-on-month (MoM) increase in the services segment. Sticky shelter prices were the main culprit for this. Additionally, goods inflation is expected to turn positive again in the near term, adding to the upside risks for core price dynamics.
While the stronger read on core has led to the repricing of terminal higher, it has mostly weighed on CHF and JPY for now, given that they are most sensitive to this market. However, TD Securities predicts that the market may give more importance to financial stability over price stability, which may help to cap the terminal rate pricing and eventually fade the dip.
Rising inflation rates can pose significant challenges for policymakers, investors, and consumers alike. Investors need to carefully monitor and analyze inflation trends to make informed investment decisions. Policymakers need to develop strategies to maintain price stability while ensuring economic growth. Meanwhile, consumers need to balance their spending and saving habits to better prepare for inflation’s impact on their purchasing power.
The increasing trend in inflation is a function of both demand and supply. During the pandemic, supply chain disruptions played a significant role in the rise in prices. As the world continues to recover from the pandemic, the demand for goods and services is expected to skyrocket, which could further fuel inflation.
Another factor contributing to the rise in inflation is the monetary policy adopted by the central banks worldwide. In response to the pandemic’s economic fallout, central banks pumped more liquidity into the system by keeping interest rates low and purchasing more assets. The excess liquidity in the system has led to upward pressure on asset prices, including commodities like oil and copper.
The Federal Reserve has signaled its intention to keep interest rates low until 2023, which may continue to fan the flames of inflation. However, the central bank has also assured that it has the necessary tools to combat inflation if necessary. Other central banks, including the European Central Bank and the Bank of Japan, are also taking a wait-and-watch approach to inflation.
Higher inflation can lead to lower economic growth, as consumers often reduce spending to adjust to higher prices. This can hurt businesses and reduce job growth. Inflation can also erode the value of money, leading to a reduction in purchasing power. Hence, it is essential to develop policies that strike a balance between economic growth and price stability.
In conclusion, while the rising inflation rates are a cause for concern, the market will place more importance on financial stability for now. The repricing of terminal rates is expected to be short-lived, and the CHF and JPY will recover soon. The policymakers need to analyze the inflation trends and develop policies that maintain price stability while ensuring economic growth. Investors and consumers need to monitor inflation trends and adjust their strategies accordingly to mitigate the inflation’s impact on their portfolios and purchasing power.
