By Russell Glaser – When it comes to inflation, the US stands pale in comparison to its rivals across the pond in Britain.
Given the loose monetary policies that have been in place since the beginning of the financial crisis in 2007, the US and British economies are in two opposite positions when dealing with inflation. But much of the same discussion is occurring in both central banks as to when another round of quantitative easing will occur. This may be fitting for the US, but disastrous for the UK.
Today and tomorrow the US will release two key inflationary data pieces. Today will see the release of PPI with an expectation of a measly rise of 0.2%, while the previous month showed an increase of 0.4%. Tomorrow will bring core CPI data which is forecasted to rise by only 0.1%. Last month core CPI was unchanged at 0.0%.
The lack of inflation in the US is a troubling sign that could lead to deflation and stagnant growth in the US economy. Therefore, the Fed is preparing another round of quantitative easing. This appears to be no longer a question of if, but when. The goal of this second parlay of asset purchases by the Fed is to stimulate not only the US economy but also increase inflation. This comes in stark contrast to the British economy which has been unable to reign in inflation.
Following Tuesday’s inflation numbers from the UK, Britain appears to have runaway inflation. British CPI climbed by 3.1%, which was in line with expectations. But core CPI, which doesn’t take into account the highly variable costs of food and energy products, climbed by 2.7%, above expectations for a rise of only 2.6%.
This bout of inflation may have been caused by loose monetary policy by the Bank of England (BOE) in their fight against the economic downturn.
But despite the rising inflation numbers, new discussions are appearing in the British media of another round of quantitative easing by the BOE to stimulate the UK economy, similar to their US counterparts at the Fed. This could lead to UK CPI rates in the range of 4%.
Typically currency traders fear inflation, unless it comes with expectations of rising interest rates along with it. Given that an increase in interest rates could stymie the tepid 1.2% growth in the UK economy, the BOE will most likely not raise interest rates anytime soon. Therefore, it appears the pound could be a fundamental sell following any rally in its value.
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