A Bourse Diary

Thoughts on stocks, speculation and ... life

Wednesday, November 16, 2005

Inflation Fears

In the last weeks topic No. 1 and fear factor No. 1 was the inflation. This was also the main reason for the worse sentiment and coused downward pressure on the stocks in October.

The inflation - and we speak now particularly of the USA, although much can be assigned to the Western European markets as well - the inflation, thus, remained rather moderate to before few months (up to the summer). The American, but also the global economy were exposed to several "inflation tests": rising commodity prices, falling dollar, decent growth rates, until recently extremely low interest rates (money market and capital market), which were actually at first intended to protect "us" against deflation. Besides, a solid development on the stock market (2003 - very strong, since 2004 in America not big profits, but nevertheless: profits) plus rising real estate prices in the USA and in some other parts of the world. One could still extend the list by some. Important is however that the American economy withstood this tests, so that we could not register much of inflation in the recent past. The forces of technologies, productivity, more intensive international competition and the better allocation of capital and work(force) in the course of the globalization (catchword: China) are obviously a very strong counterweight to the inflation forces mentioned above. Even at present the core CPI is on a quite acceptable and conformal level.

The inflation concerns came from the high energy prices, which finally affected the overall inflation rate and also the PPI (Producer Price Index). Obviously energy prices on such price levels cannot be absorbed by productivity increases (or the like) by the economy without inflation. Nevertheless I want to state that the American (in addition, the global economy) has no structural inflation problems.

This was however not always like that... (to be continued)


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