One of a number of the purported reasons for the weakness in equity markets this past week has been a further flattening of the yield curve, which, in a somewhat reflexive manner, is being taken as a sign that growth and inflation are likely to be lower and slower than previously believed. Furthermore, this might also be related to fears that with a new Fed chair, and potentially a bevy of new governors, the FOMC will have a greater bias toward tightening policy—more than would have been the case in the experienced hands of Yellen, Fischer, and Dudley—to shore up its inflation fighting credentials with financial market participants. In this week’s Economics Weekly we take a look at one supposed reason for the decline—a belief that inflation will remain completely inert—with the conclusion that cyclical inflation is firming following a dip through 2017 and this is something the market does not seem to be currently focusing on, perhaps because it knows that structurally we are still very much in a ‘lowflation’ environment.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.