Inflation — the double edged sword

The good news: inflation is a natural consequence of dynamic demand, apparently, comes back to us. In the US full-time employment (in November the unemployment rate was only 4.6%) wages began to rise again, the rise in consumer prices is approaching the fed’s planned 2%. In the Eurozone it needs to cross the mark of 1% next year. The economy finally throw off the shackles of the monstrous negative interest rates the last two years.

The bad news: the rise in oil prices has purchasing power. For example, diesel prices in France jumped by 21% in 2016. In addition, by itself, the unfreezing of prices will not like very much. Whether pensioners whose incomes are fixed, or the state, on which hangs a lot of debt. Debt burden of the state will only increase amid rising market interest rates (0.1%, the French ten-year bonds on 8 July against the current of 0.7%).

Revenue decline in Europe

Like the language of Aesop, inflation — simultaneously the best and worst of what can happen. In the US it says the resumption of positive economic dynamics. “By 2018 the us economy will overcome the level of potential growth, forcing the fed to raise rates to prevent inflation risk,” — said Denis Ferrand (Ferrand Denis) from Coe-Rexecode.

In the Euro area formed a completely different picture. The rise in consumer prices is associated mostly with the increase in the cost of energy and raw materials in connection with the increase in world prices and the dollar. “Do not confuse the internal with the external inflation, which leads to a decrease in real incomes and demand,” — emphasizes Patrick Arthus from Natixis.

In such circumstances, it is only to complain about the confusion that remains around the ECB statement. There is no assurance that the return of inflation will reduce the burden of the national debt. “The worst case scenario, external inflation will lead to higher real interest rates, as is likely to be in Italy,” warns Patrick Arthus. The ECB may be in a difficult situation. Therefore, the return of inflation looks like a double-edged sword.