XTrade Shines the Spotlight on Reflation

reflation

Reflation is the fiscal policy to limit the effects of deflation. It may involve tax reductions, money stocks and lowering interest rates. Will central banks succeed in their target?

When confronted by a galloping deflation, most central banks have been endeavouring to raise lowered levels to prompt economic advance. At XTrade we wonder how hopeful we can be in view of past events. Taking as reference the CPI (consumer price index), from January 2015 to June 2016, the United States economy has been the most successful in the reflationary ambit. The estimate is that the Eurozone and the United Kingdom will reach U.S. current levels by January 2017.

What has happened in the U.S.?

Service-based constituents of CPI, like rents, are increasing at more than 2% per annum. Also the falling of the unemployment rate to 4.7% (the lowest since 2007) has an impact on wages, owing to the fact that strained later markets usually lead to surging wages. So it all looks like the weight of inflation will increase.

The experts and leaders at XTrade thus entertains the possibility of the United States taking the lead in a reflationary tendency driven by the soaring of prices in the services sector and a modest rise in wages. However, that point of view should be pondered with the fact that the nominal economic growth is not high at all and that there is a world surplus as the demand is lower than the stocked production.

According to XTrade, U.S. Pattern Could Affect UK

You probably see that the difficulties to generate raw inflation numbers may lessen as we enter the latter part of the year. This company realised that oil prices seems to have bounced back so, technically, the CPI should begin to look better in the months to come. If, then, the prices in the energy sector and core inflation would remain at the same levels, we could predict an estimate of abnormally high levels of almost 2.5% by the beginning of 2017 in the U.S.

What would happen then to the Eurozone, Japan or the United Kingdom?

Well, keep in mind they start from a lower—much lower—base. While the CPI inflation index was 0 for the U.S. at the beginning of 2015, the Eurozone CPI inflation index was almost -0.5%. And it is true, at that time both Japan and the UK were barely below +0.5% but the US seemed to quickly overtake them in a climbing trend.

Nevertheless, it is quite likely that all—the eurozone, Japan and the UK—will follow the escalating inflation movement that the U.S. are expecting.

What would happen, though, if the British pound experienced a sharp fall? According to XTrade, that would aggravate the inflationary pressures in the United Kingdom. However, this unhurried growth could have a depressing effect on the inflation expectations in the eurozone. So if the price of oil would stabilise at the levels it is right now, the headline inflation could quite likely rise from lower levels.

photo credit: via photopin (license)

Leave a Comment...

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.