What to Expect from This Week’s Inflation Data Releases – Introduction
In the past two weeks, the focus among global investors was about the central banks decision. In the previous week, the Euro’s ECB and the United States’ Fed met to discuss about the economy and issue their decisions on the interest rates.
At the end, both the ECB and the FED left interest rates unchanged as was expected. In addition, they provided guidance as was expected by the market. The ECB assured investors that they will continue with the stimulus package until or beyond September this year. On the other hand, Fed left investors waiting for three more rate hikes this year.
Last week, several central banks including the Reserve Bank of New Zealand, Reserve Bank of Australia, and the Bank of England had their meeting. Like their counterparts in the EU and US, they both left interest rates unchanged. The biggest shocker was the BOE’s statement that they might move to hike rates earlier than expected. Before the meeting, investors expected rate hikes to start this May. Now, there is a likelihood that this could come as early as March.
This week could be a good indicator of what to expect from the central banks. This is because we will receive the inflation data from the UK, Germany, EU, and from the US. We will also receive the GDP growth from Japan.
As you know, the central bankers have two main goals. Their first goal is to ensure financial stability in the system, and their second goal is to ensure the price stability of products. They also have a goal of ensuring that the economy has enough jobs for everyone.
Following the 2009/9 crisis, the central banks moved to stimulate the growth by bringing interest rates to zero and implementing an experimental program known as Quantitative Easing. This is simply a way for the banks to print money to buy financial instruments like mortgage backed securities.
Now, to prevent the economy from overheating, the central banks are embarking on a program to tighten the monetary policy. By this, they are working to end the QE and raise interest rates. By doing this, they want to remove complicity in the financial market.
As they do this, they must ensure that the rate of inflation is well contained. Most central banks have put a target price of 2%.
Therefore, this week’s reading of inflation could mean a lot to investors. As you recall, in December, the inflation data in the UK reached a high of 3.1% which is 1.1 points above the target price. In January, the rate declined slightly to 3.0%. Tomorrow, investors expect the data to show an inflation rate of 2.9%. If it shows lower, it could mean less chances for tightening but a surprise to the upside could mean more rate hikes.
On Wednesday, we will receive inflation data from the US, Germany, and the EU. A common trend among these countries is that inflation has failed to reach the 2% target. Nonetheless, a surprise number caused by higher energy prices and more money due to Trump’s tax refor could solidify the case for more rate hikes.