The inflation ogre rears its head

Something is afoot that threatens the snail’s pace of US rate increases. Inflation is stirring in the US. After spending more than a year below an annual rate of 1% due to falling oil prices, the Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 1.7% in the 12 months to February, a three-year high and faster than Fed policymakers expected prices to rise in December. While the Fed made a popular decision by signalling two rather than four rate increases in 2016, that gesture is a gamble. The US economy expanded at a 2.4% pace in 2015 because consumers are spending and the economy is operating around full employment. Theory and history suggest inflation will speed up. The danger is that inflation bursts through the Fed’s target and the Fed has to raise rates faster than intended to contain price increases. Investors be warned. The Fed has taken a wager the world can ill afford to go wrong. (VIEW LINK)