EVER since the financial crisis of 2008, forecasters have scanned the horizon for the next big disruption. There are plenty of candidates for 2016. China’s economy, whose might acted as a counterweight to the slump in the rich world in the years after the crisis, is now itself a worry. Other emerging markets, notably Brazil, remain in a deep funk. The sell-off in the high-yield-debt market in December has prompted fears of a broader re-pricing of corporate credit this year.
Yet one worry is absent: financial markets are priced for continued low inflation or “lowflation”. A synthetic measure, derived from bond prices, puts expected consumer-price inflation in America in five years’ time at around 1.8%. That translates into an inflation rate of around 1.3% on the price index for personal-consumption expenditure (PCE), the measure on which the Federal Reserve bases its 2% inflation target. Ten-year bond yields are just 2.3% in America, and are below 2% in Britain and below 1% in much of the rest of Europe. The price of an ounce of gold, a common hedge against inflation, has fallen to $1,070, far below its peak in 2011 of $1,900. Yet market...Continue reading
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