The Invisible Threat: Why Inflation Remains in Focus

It is tempting to believe that the Federal Reserve's fight against inflation has ended with the recent interest rate cuts and the increased focus on the labor market. However, this impression could be misleading, as highlighted by Deutsche Bank in a recent analysis. Even if inflation is close to the Fed's targeted goal of 2%, it is too early to give the all-clear, as prices remain unexpectedly high amid monetary easing. If inflation indeed returns, the impacts on the markets could be significant, as demonstrated by the massive bond and stock sell-off in 2022. Deutsche Bank emphasizes five reasons why inflation risks should continue to be monitored. Firstly, the interest rate cuts have been broader and deeper globally than expected. While the Fed in the US has reduced the benchmark interest rate by 50 basis points, Deutsche Bank urges caution, as persistent inflation is possible, especially during periods of monetary easing. Additionally, economic stimuli from China and increasing geopolitical tensions in the Middle East have led to a significant rise in commodity prices. Oil prices rose sharply in October, attributed to tensions between Israel and Iran. If the situation escalates, prices could soar drastically. Another factor is the decreasing recession probability in the US, which could favor a persistently high level of inflation. Strong economic growth brings additional demand and consequent price pressure. Also notable is the recent consumer price index report for September, which surprised with higher-than-expected figures, as the core consumer price index recorded its fastest growth in six months. This is an alarming signal indicating that certain categories remain particularly prone to price increases. Finally, money supply growth is also increasing, which can be regarded as a precursor to persistently high inflation. The M2 money supply in the US rose by 2.0% in August compared to the previous year, reaching the highest growth rate since September 2022.