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What's going on?
Prices of consumer goods in the US rose at the highest rate in more than two years in December (i.e. inflation increased), but its still unclear if the pickup in inflation will be sustained and the answer to that is important for everyone.
What does this mean?
Higher fuel prices, a result of the oil price increasing sharply compared to a year ago, are responsible for much of the increase. However, if you strip out the impact of fuel prices (and other volatile components), the core inflation rate accelerated only very moderately, which suggests that underlying inflation isnt increasing much. For inflation to sustainably rise, the core rate will likely have to start increasing more substantially (in other words, the effect of the oil price is an external factor that can be very volatile, so economists tend to watch core inflation instead).
Why should I care?
For markets: Whether inflation will increase sustainably is an important question for investors.
Rising inflation is typically bad for bonds because a bonds cash payout to investors is worth less as inflation goes up (i.e. it buys less stuff due to rising costs). And remember, interest rates go up as bond prices go down (why? click here). Since higher interest rates increase borrowing costs for companies, they can hurt profits and, therefore, stock prices. Conversely, if bonds become less attractive, stocks could benefit as investors shift out of bonds and into stocks. In short, inflations impact on stocks is less clear than on bonds.
For you personally: Rising inflation would have a big impact on you.
The higher oil price is resulting in increased fuel costs for virtually everyone, which is one major reason that inflation is hitting multi-year highs in Europe and the UK as well. One bit of good news is that, in most countries, wages are increasing too, which is protecting people from the impact of higher prices. However, higher inflation could lead to higher interest rates (as discussed above), which would push up the cost of borrowing money (e.g. mortgage rates).
Originally posted as part of the Finimize daily email.
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