What’s Going On Here?Fresh US data on Wednesday showed the rate at which prices of goods and services increase rose faster than economists predicted in February. And now, for the country's next trick, that inflation might be about to disappear altogether… What Does This Mean?Last month’s prices were slightly higher than analysts expected, and 2.3% higher than the same time last year. And “core” inflation – which excludes food and energy prices, since they tend to swing from month to month – hit its highest rate since September, which was in turn the highest since 2008. That beat estimates and the US central bank’s own target alike.
Then again, last month’s energy prices were 2% lower than in January. That’s likely a reflection of this year’s falling oil price: the price of a barrel had dropped even before Saudi Arabia’s price-lowering tantrum this week, with declining global economic growth forecasts partly to blame. Why Should I Care?For markets: Divergent trends.
The US Federal Reserve’s interest rate cut last week should free up consumers’ cash by making borrowing cheaper (and therefore more attractive) and saving less rewarding. That additional spending power should see demand for products and services rise, and their prices too. But the oil price could offset that trend: it’s a key constituent of plastic, which is used in everything from sneakers to toys. And no matter the interest rate, those products’ prices – and plenty of others – are likely to go down if the oil price languishes.
For you personally: Next stop: deflation?
Dozens of industries may be under pressure to stimulate consumer demand by cutting prices because, for one, coronavirus is disrupting said demand and, for another, a major cost – oil – is now that much cheaper. And if, for example, Nike, lowers its prices, Adidas is likely to follow suit or risk losing out. And yes, lower and lower prices are good for your bank balance – but they could ultimately cause dreaded deflation. | 