Ouch!
It was no fun to be an investor last week. The week prior, a commentary in The Wall Street Journal’s blog, MoneyBeat, offered this insight:
“Falling oil prices are thought to be good for stocks because they stimulate consumer spending and hold down inflation. The lower costs support economic growth, boost corporate earnings, and lessen pressure on the Federal Reserve to raise interest rates. The stock market loves that mix.” (more…)
So here we are, still faced with a huge deficit, and although it has come down over the past few years, it is now showing signs of flat-lining and even rising slightly. The Tories claim they have the answer, and I expect Mr Milliband says the same although he just forgot to mention it, and we await somewhat wearily the views of the others. So are we stuck in a funk and unable to retrieve the situation and just doomed to be sucked into the Slough of Despond?
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A year ago, nobody – including Mr Osborne – expected the 2014 Budget to be set against such a relatively benign economic background for the UK. In March 2013 the talk was of a triple dip recession, as the country had just recorded a contraction of 0.3% in the final quarter of 2012. Inflation, as measured by the February 2013 Consumer Prices Index (CPI), was running at 2.8% and had been above its 2% target since December 2009. In Europe the latest round of the Eurozone crisis was taking place, with Cyprus becoming the fifth EU member to seek a bailout. All in all, it was not a pleasant economic backdrop against which to present another austerity-as-she-goes Budget that promised a further £100bn+ government deficit for the coming year. (more…)
You really need to take predictions with a grain of salt. Consider these esteemed opinions:
It’s important to remember the fallibility of experts as we head toward a new year and pundits begin pontificating about the events of the past and predicting what may be ahead.
Exceptional… exceeds expectations… meets expectations… needs improvement… unsatisfactory. It’s a rating system familiar to anyone who has ever received a performance review. Right now, the performance of inflation is not meeting expectations – and that may be a good thing.
According to the Bank of England, economists assume interest rates will rise and move toward equilibrium or a ‘natural’ real rate of interest that takes into account inflation over the long term.
When you have retired, your goal is to expire before your bank account does. The easiest way, of course, is to take up juggling hatchets.
A more moderate solution, however, is to try and figure out how much you can withdraw each year – a tricky calculation at best, since you know neither what you’ll earn in any given year, nor what the rate of inflation will be, nor how long you’ll live.
But that doesn’t appear to be the case when it comes to Federal Reserve monetary policy. For some time, the Fed has been communicating its intention to gradually cut back its bond purchasing program (a.k.a. quantitative easing) while keeping the target fed funds rate steady. The target fed funds rate is the interest rate at which banks borrow money from each other overnight. The Fed has not taken action yet, but its words have caused nominal bond yields to rise and inflation expectations to fall. Typically, these changes are associated with tightening monetary policy.
Much like school children trying to capture the attention of someone they have a crush on, the economy sent lots of mixed signals last week.
The Consumer Prices Index (CPI) grew by 2.4% in the year to April 2013, down from 2.8% in March. By far the largest downward contribution came from transport costs (notably motor fuels and air fares). The only notable upward contribution came from price movements for food & non-alcoholic beverages. This is the first time that the growth in inflation has slowed since Autumn 2012. Over the last six months, the CPI 12-month rate has been particularly stable.
