by Michael Arbow MBA
Partner, RSD Solutions Inc.
Here in the rich western world, consumers are witnessing an interesting disconnect; namely the difference between what we see at the gas pump and grocery store and what we hear when our government’s announce inflation rates. The disconnect stems from the definition of core verse headline inflation rates. The core rate strips out the so-called "volatile energy and food prices". Luckily, for many in the West the rising cost of food and energy is an annoyance and living with the core rate of inflation – from which the countries’ central banks base their interest rates on, is grudgingly accepted.
On the other hand however, in the emerging economies where household incomes are lower and food and energy consumes a substantial portion of household income; national governments consider these elements as part of core inflation. Thus you are finding increased pressure for the central banks of emerging economies to raise interest rates to tame inflation and protect their currencies. The local trickle down effect of this will be for consumers to seek higher wages. Higher wages, when combined with higher (commodity) input cost will translate into higher prices charged on manufactured products. Once exported Asia’s pivotal role as deflation exporter will change; for their manufactured exports help constitute core inflation in the developed economies.
As core inflation rises, so to will interest rates. If your firm is highly leveraged and thus sensitive to interest rates what steps are you taking today to reduce this future financial risk? For the consumer, perhaps locking in longer terms rates is starting to look more attractive.
For more on this follow the link to Pimco’s Mihir P. Worah’s viewpoint:
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