Brave new world – rising inflation

András Cserháti
Senior Product Manager

The commodities market – A natural hedge against growing prices

These days many countries are faced with inflation rates that are not merely low, but negative. On first hearing this could even sound like a good thing, but similarly to high inflation, deflation is no good for the economy either. A sustained decline in price levels can often result from a drop in the supply of money and/or credit, but a drastic curbing of consumption by the government, households and companies can also lead to deflation. One of the unpleasant side-effects of deflation is a rise in unemployment; and falling price levels can also be particularly dangerous if the deflation is factored into future expectations, since the resulting deferment of consumption can further exacerbate the economic downturn. It is no coincidence, therefore, that the central banks are equally wary of both extremes and attempt to tread a middle path, aiming to achieve what is known as a “Goldilocks” economy: on that isn’t too hot to generate serious inflation, or cold enough to spark a recession through sustained deflation. A good example of this was the US economy in the mid-1990s, which was neither too hot nor too cold, but worked “just right”. Maintaining such an idyllic state in the long term is no mean feat, and just as in the fairy tale Goldilocks, things only go swimmingly until the three bears return (the bear market) and demand their porridge, which has of course long been eaten.


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