Why inflation may overrun the Fed

Labour market tightening, housing shortages, and an eventual stabilization in commodity prices could move inflation sharply higher, upsetting the Fed's gradual strategy.

Robert Johnson, CFA 19 December, 2015 | 6:00PM

It was another one of those weeks with lots of daily changes but little net change by the end. Most developed world markets were little changed for the week, running up early in the week before the Federal Reserve's interest-rate hike, then spending the rest of it worrying about the longer-term path for interest rates along with oil and commodity prices, which still haven't managed to find a bottom. Commodity indexes were down almost 2% on the week.

Emerging markets, which were anticipating the worst from the Fed, managed a healthy 3.8% gain for the week. Better economic data in China may also have helped boost the emerging markets. For the week, the U.S. 10-year Treasury rate increased from 2.14% to 2.20, having already anticipated the Fed's 0.25% short-term rate increase.

While the Fed garnered almost all of the attention, the real news was on the economic front around the world. News out of China included better-than-expected retails sales, industrial production, and even home prices, suggesting that while China's economy is no longer bustling, it is not falling apart, either. Purchasing manager data for the European manufacturing sector also continued to improve, with notable gains in employment when combining manufacturing and service sector data. The improvement in Europe appears to be in the early stages of growth, with gains feeding on themselves in a virtuous cycle.

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Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.

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