Oil prices are stable. Is inflation stabalising too?
Don't be fooled. The stability may not be sustainable.
By Friday evening, the S&P 500 soared 3%. The story, according to MT NewsWire, is that
The year-ahead inflation expectations eased to 5.3% in June from a preliminary reading of 5.4%, according to the survey results.
What central bankers are deathly afraid of is price inflation expectation. According to their understanding, if people expect price inflation to continue and rise, then there will be price inflation. That is because if you expect prices to go up in future, then you will bring forward your purchases to today, thereby contributing to the increase in the velocity of money. The velocity of money is another word for the turnover of money.
The increase in velocity of money, coupled with profligate Quantitative Easing (QE) (also known as ‘money printing’) over the years (especially the last 2 years) can be a deadly combination to kick off high inflation, possibly even hyperinflation.
Therefore, an easing of inflation expectations will result in an easing of the velocity of money, which in turn will result in a peak in price inflation. A peak in price inflation will at least result in a slowdown of interest rate rises. If all the planets align together, maybe even an easing of interest rates.
That is the reason why stocks soared on Friday.
But do not count on it. I believe the easing of price inflation expectations may not be sustainable. Why?