A Bourse Diary

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Wednesday, January 18, 2006

Consumer price index rises 3.4 percent

Consumer price index rises 3.4 percent

Not that good! Albeit the core inflation rate remained relatively tame at 2.2% it is still providing cause for the FED to go on with tightening. Of course one should consider the time-lag of the monetary policy impact, though higher interest rates are generally not good news for the stock market. Fortunately the long term bond yields stay still relatively low. The danger is now, if slow down of corporate results (earnings, sales etc.) will be followed or even conicide with economic slow down (due to time lag of monetary policy and/or normal business cycle) providing both - uncertain outlook on economic and corporate development as well unfavorable liquidity situation.

More information at Business Week: Consumer price index rises 3.4 percent

Some more on that issue in BloggingWallstreet:

Trickle Down Inflation Theory

Overall I'd say that the data does not support the inflation lag theory. There's no historical evidence to suggest that inflation in the headline number, which includes volatile food and energy prices, leads to core inflation in the future. It's another economic myth we can all stop worrying about.
It's worth reading the whole posting.


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