U.S. consumer prices rose 0.6 percent (more than forecasted) in May as Americans paid more for fuel, underscoring the Federal Reserve's concern that inflation will pick up.
The surge in oil and food expenses has caused inflation expectations to rise, stirring concern among Fed officials after they lowered interest rates seven times since September.
Investors expect the central bank will raise rates as soon as August, futures prices show.
Implications/analysis:
If Interest rates are raised?
- Target inflationary pressure
- Avoid wage-price crisis that may ultimately lead to endemic inflation
- Correct prices which have been caused by loose monetary policies and cheap lending. However,
There may be a large impact on Real estate values, investors, lenders and service providers and it may not actually reduce demand much further if people are already cutting back on spending. Another concern on a rapidly deteriorating economic environment means short term unemployment numbers may worsen further..
Justification:
US Retail sales for May did show surprising strength, rising 1 percent
If Interest rates were lowered?
- Provides short term support for asset prices - political agenda?
- Improve business confidence and reduce impact of recessionary pressures
- Further emphasize the effect of easy money...
- Asset prices may become uncontrollable
Justification:
Sudden surge in structural demand for commodities caused by rapidly emerging economies is just a short term blip which may stabilise soon
Jump in energy prices due to speculation
My take is that FED/ECB/MPC will watch the oil prices and the following releases very closely to gauge for an escalated need to tame the loose 'Infl-animal' (couldn't resist coining it, but you saw it here first)
Eric Tan, London
Worth noting this week:
EMU CPI data (euro zone) 16-Jun
US PPI data 17-Jun
UK May retail sales data 19-Jun
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