THE strength of the global economy is one reason why the stockmarket has started 2018 in a buoyant mood (with the Dow passing 25,000). At some point, in any expansion, businesses find it harder to recruit workers or get the materials they need; these bottlenecks cause wages and prices to rise. Central banks then start to tighten monetary policy, a process that can eventually turn the market (and the economy) down.
After many years of ultra-low interest rates, the Federal Reserve has started to tighten monetary policy. There were three rate rises in 2017, and three are expected this year. The idea is to tighten gradually and keep ahead of the curve so that inflation does not accelerate so fast that a very sharp monetary tightening is needed.
The problem is that inflation remains hard to spot. Continue reading