Inflation Watch: Rate Hike Looming?

Would you like a 30% salary increase this year?

Who wouldn’t, right? Everyone can use some extra cash.

Well, according to a recent survey by Willis Towers Watson, 35% of businesses are planning for a salary increase before the year ends…the third one this year.

As you may have figured out, I am not talking about businesses in Australia…but Argentina.

As reported by Ambito, an Argentinean newspaper, even with an estimated 30% salary rise by the end of the year, paycheques will have lost on average about 11.7%, as you can see in the graph below.

This is because inflation is estimated to end the year at a high 42%.

Inflation 2015 to 2018

Source: Ambito

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If you have ever suffered inflation or hyperinflation, you know that it is a real wealth killer. Inflation can quickly erode your salary.

I don’t say this lightly.

Growing up in Argentina I saw first-hand the devastating effects of hyperinflation.

Prices go up by the hour. You better get your coffee early in the morning because by the afternoon prices will have changed.

Once people received their pay at the beginning of the month, they would rush to the supermarket to buy the groceries for the month. By the end of the month their salary was worth less, much less.

That’s why they would also face large queues at the banks…to exchange their money into US dollars.

You see, that was the only way to keep the value of your salary until the next pay check. But it was all a vicious cycle, the fact that people were getting rid of their Argentinean currency would feed inflation even more.

And, once inflation starts it’s hard to stop.

In the last week, stock markets around the world have been plummeting. The NASDAQ lost over 6% of its value, the Dow dropped over 1,000 points last week, as you can see below.

Dow Jones Industrial Average

Source: Bloomberg

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The CBOE Volatility Index (VIX), the fear index, has spiked. If you are not familiar with the VIX, it measures investor’s expectations on volatility in the near future. Obviously, investors are seeing troubled waters ahead.

If you want to protect your family wealth, you need to know why this financial expert is predicting economic collapse. Find out more here.

Why we should fear inflation

They may be blaming the bond market for the latest drops, but the real fear here is inflation. Inflation will bring higher interest rates and have a cut of corporate profits.

Remember when the markets tumbled back in February?

Markets panicked back then because a US jobs report showed wage growth was picking up. That is, investors feared that inflation was making a come-back, and that the US Federal Reserve would be tightening monetary policy faster than expected.

So far, inflation has remained subdued. The latest report shows inflation has increased less than expected. And…there aren’t high expectations that inflation is likely to pick up anytime soon. The graph below shows the projected annual inflation rate.

Graph of inflation

Source: Statista

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Yet inflation could come roaring back at any time.

As we have written before, the US Federal Reserve is increasing interest rates and reducing the money supply through Quantitative Tightening. That is, they are doing the opposite of what they have been doing since 2008.

They want to raise interest rates and decrease its balance sheet so as to have ammunition for the next recession.

But, it is not just the Fed ending stimulus. The European Central Bank (ECB) is also winding down its bond purchases and looking to end them by December.

The end of globalisation could trigger inflation. A trade war could reverse globalisation and bring in higher prices, which would drive the Fed to increase interest rates at a higher pace.

And, oil prices are rising, which is also inflationary.

If inflation spikes, then it will cause the Fed to speed up the pace at which it is increasing interest rates. This could be a problem in a highly leveraged world. US and world debt are currently at all-time highs.

The Fed is already looking at tightening quicker than initially thought.

The US Fed chairman Jerome Powell recently said emphasis mine: ‘Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral. We may go past neutral, but we’re a long way from neutral at this point, probably.

Right now, if there is an indicator you should be watching is the US inflation.

Why?

Because once inflation shows, it is hard to control. Rising inflation would mean more rate hikes.

And a sudden surge in inflation in the US could have an effect all over the world.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Financial expert Vern Gowdie explores why a credit collapse could occur in 2018, and how you can protect your assets. Click here for free action plan.


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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