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Inflation Still Dragging Its Heels

0108_eurozone

Image source: Razvan Iosif / Shutterstock.com

What's going on?

Price rises are still more tortoise than hare in the eurozone, encouraging Europe’s central bank to maintain policies that are helping support stock prices in all corners of the world.

What does this mean?

Despite relatively strong economic growth, inflation in the eurozone stumbled in December (as economic activity increases, higher demand is supposed to push up prices more quickly). More important is the fact that underlying inflation (a.k.a. “core” inflation), which strips out volatile goods that are subject to external factors (like the oil price), failed to improve on a meager 0.9% annualized rise. Good for your shopping basket, maybe – but concerning for economists (why? Click here).

Why should I care?

For markets: Low inflation is encouraging central banks to maintain an environment that’s positive for stocks.

One of the European Central Bank’s main priorities is to keep inflation close to 2%. In order to boost inflation, it’s thrown everything but and the kitchen sink at the problem, including directly buying bonds of European governments and corporations. Such acts have made it harder for investors to make decent money from bonds, encouraging them instead to buy “riskier” investments, like stocks, in the hope of getting better returns. In the opinion of many investors, these actions have been a major factor pushing up stock prices globally. If inflation were to rise meaningfully, one would expect these policies to be more quickly withdrawn, threatening stock prices – but so far, that’s just not happening.


The bigger picture: The inflation conundrum is global – for now.

Although inflation is particularly weak in the eurozone, it’s also remained persistently low in most of the developed world. Whether this conundrum – low inflation despite a global pickup in economic growth and employment – persists is perhaps the key issue for investors in 2018.

Originally posted as part of the Finimize daily email.

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