Back in the 1970s and 1980s, discussions regarding inflation tended to focus on slaying the “inflation dragon”. Inflation had been high since the “oil shock” in the early 1970s and western economies had performed poorly in terms of growth and unemployment when compared to the previous decade. Studies conducted in later decades would indicate countries with high inflation tend to have lower economic growth rates compared to countries with low inflation.
Despite this knowledge, the US Fed has in recent years spent trillions of dollars buying bonds from the private sector in exchange for central bank cash in an attempt to raise US inflation back to its target range. However, inflation has remained stubbornly low and more like a frilled-neck lizard than a dragon. CPI figures released by the US Labor Department for June indicate consumer prices rose 0.2% for the month, 1.1% for the year and less than the 0.3% expected by financial markets. Core prices, the measure of prices which strips out food and energy prices changes, also rose 0.2% for the month but over the last 12 months the rise was a more substantial 2.3% (seasonally adjusted).
Rising medical care and housing costs were partially offset by falling prices of used vehicles. AMP Capital’s Shane Oliver said the figures suggested the “deflation threat [was] receding.” The numbers had little effect on US bond markets and on the day, the 2 year bond yield was down 1bp at 0.67% while the 10 year yield finished 2bps higher at 1.55%.
