Inflation Data Surges, Federal Reserve Nervous

This morning saw the Bank of England surprising the financial markets by not lowering interest rates as had been expected. This move is shocking because it goes in the face of all other global central banks and their easy money policy. After Brexit, the Bank of England was in a perfect position to lower rates but chose to stand firm. Could this be a new wave of central bank thought? Is easy money policy not the answer to energizing growth?

For the United States, perhaps the bigger news came in the form of economic news. The Producer Price Index, which measures inflation came in at 0.5%. This was the largest increase since May 2015. The sharp increase in inflation is likely to cause the Federal Reserve to worry. Over the last year, the decent economy and super strong stock market has not caused the Federal Reserve to hike rates since December 2015. Their reasoning has been that inflation is still non existant.

If this inflation data becomes a trend at these levels, the Federal Reserve will be forced to raise interest rates or face a far worse future of stagflation. Stagflation is the most feared of all scenarios where inflation spikes but growth is flat. This means prices of goods jump higher but average income stalls and economic growth drags.

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