Agis
July 6th, 2005, 10:39 AM
According to the Danes:
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Stagflation on the way
Over the past year, growth in the US has continued to be robust, unemployment has fallen and the economy's resource use has risen meanwhile, inflation has increased substantially. Rising inflation has been due to external pressures from swelling commodity prices and a weaker dollar, but it is also a sign of more internal pricing power and pressure from the labour market in the form of rising option and bonus payouts. Oil prices, however, have shaved the top off growth and remain a threat. With the price of oil hovering around USD 60/barrel, more mixed growth signals, a flagging global industrial sector and a fed funds rate that, when all is said and done, has been hiked by 225bp, the going is beginning to get tougher but only for growth. The relationship between growth and inflation is not simple. And developments in the two numbers are not coincident. Rising growth alongside falling inflation is perfectly possible. This was what the USA experienced from 2002 to 2004. On the other hand, does lower growth necessarily mean
lower inflation? With the greatest oil price shock since the 1970s the question is rather if rising inflation despite lower growth is on the way. This is a scenario we have been toying with since mid-2003 (when we released a series of papers under the common title "Hour of Denial" that argued that the Federal Reserve was about to make a monetary policy mistake by tightening too little and too late). This is beginning to look ever more likely. We still see US core inflation at around 3% y/y at the start of 2006 and we still
expect solid growth this year of 3.6%, driven by consumption and the housing market. But even with lower growth, inflation will continue to rise especially if the price of oil is the driver of the slowdown. In this situation, the FOMC will have to choose sides: Support growth or fight inflation? We believe they will lean to the latter. So expect many more rate hikes than the market is currently pricing in."
http://danskeresearch.danskebank.com/link/WeeklyFocus01072005/$file/WeeklyFocus.pdf
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Stagflation on the way
Over the past year, growth in the US has continued to be robust, unemployment has fallen and the economy's resource use has risen meanwhile, inflation has increased substantially. Rising inflation has been due to external pressures from swelling commodity prices and a weaker dollar, but it is also a sign of more internal pricing power and pressure from the labour market in the form of rising option and bonus payouts. Oil prices, however, have shaved the top off growth and remain a threat. With the price of oil hovering around USD 60/barrel, more mixed growth signals, a flagging global industrial sector and a fed funds rate that, when all is said and done, has been hiked by 225bp, the going is beginning to get tougher but only for growth. The relationship between growth and inflation is not simple. And developments in the two numbers are not coincident. Rising growth alongside falling inflation is perfectly possible. This was what the USA experienced from 2002 to 2004. On the other hand, does lower growth necessarily mean
lower inflation? With the greatest oil price shock since the 1970s the question is rather if rising inflation despite lower growth is on the way. This is a scenario we have been toying with since mid-2003 (when we released a series of papers under the common title "Hour of Denial" that argued that the Federal Reserve was about to make a monetary policy mistake by tightening too little and too late). This is beginning to look ever more likely. We still see US core inflation at around 3% y/y at the start of 2006 and we still
expect solid growth this year of 3.6%, driven by consumption and the housing market. But even with lower growth, inflation will continue to rise especially if the price of oil is the driver of the slowdown. In this situation, the FOMC will have to choose sides: Support growth or fight inflation? We believe they will lean to the latter. So expect many more rate hikes than the market is currently pricing in."
http://danskeresearch.danskebank.com/link/WeeklyFocus01072005/$file/WeeklyFocus.pdf