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Interest Rate commentary: Inflation still not bubbling to the surface, Cheap money continues – swisspartners – The art of finance

Inflation still not bubbling to the surface
Cheap money continues

Investor expectations of future inflation have remained at relatively low levels despite some bubbling up of asset prices in the carefully watched Commodity sector. By way of example, copper has been increasing in value for over one year as investors began to realise that some Chinese suppliers are in the process of being wound down as their Government reduces the number of State Backed mining enterprises.

However, in recent months there has been few signs of higher than expected wage settlements in most developed markets and this has helped to keep inflation down in most regions. Moreover, there is also perhaps a growing realisation among populist minded reformers that recent demands for higher minimum wages may actually not be the ‘magic bullet’ for future prosperity. Once wages bills rise, most employers will naturally look to protect profit margins and will cut costs by creating fewer positions or even reducing hours. As it seems unlikely that simultaneously oil, wages or populist demands will lead to higher input costs over the next 12 months, future European and US interest rates seem set to remain low.

Perhaps the greatest threat to interest rate forecasts over coming years may come from a ‘change of the senior guard’ at the Federal Reserve (Yellen) and ECB (Draghi). Investors are rightly focusing on these topics – especially if it seems likely to cause a major departure from what has become the ‘new normal’ of cheap money.

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