Inflation tests ahead, currencies often not cooperating

Sat Apr 9, 2016 7:07am EDT
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By Ross Finley

LONDON (Reuters) - With the world economy entering a more uncertain phase and the top central banks sounding ever more cautious, attention may turn in the coming week to signs of whether years of aggressive stimulus have yielded any significant rise in inflation.

The U.S. Federal Reserve, the Bank of England and the European Central Bank all have been disappointed to varying degrees about how little inflation has picked up, or indeed how it has spent too much time going the opposite way.

The Bank of Japan, which has been trying to ward off deflation going on two decades, has now been hit with a counterproductive surge in the yen after a contested decision last month to adopt a tiny negative interest rate.

Even in China, where it is difficult to fathom the sheer magnitude of fiscal and monetary stimulus Beijing has piled on since the financial crisis, consumer price inflation is remarkably tame and likely to remain so.

For developed economies, the worry is whether a slowdown in growth over the past several months will get in the way of what many central banks are hoping for: pressure on inflation through wages as labour increasingly becomes more scarce.

Already there are signs the dramatic fall in unemployment in the United States and Britain, and to a lesser extent the euro zone, is starting to slow, which is normal this far into an economic expansion, albeit an uneven and lacklustre one.

"The U.S. merits special attention," writes David Hensley, a director of global research at J.P. Morgan.

"If the U.S. unemployment rate were to stabilize at 5 percent, the Fed would have much less incentive to hike rates unless this level of unemployment turns out to be low enough to generate a sustained rise in wage and price inflation, something Chair Yellen has expressed considerable skepticism about."   Continued...

People walk on a bridge in the financial district of Pudong in Shanghai, China, April 5, 2016. REUTERSAly Song