Inflation Genie Lurking?

Last night we saw the US Fed’s preferred inflation measure, the Core PCE, tick up slightly to 1.4%, still well below their target of 2% but a stop to the yearlong falls.

The market was more focussed on McCain backing the tax reforms, meaning the GOP are only a couple of votes away from actually passing the bill.  Shares hit new all time highs despite those votes seeming set.

But what about the December rate hike??  1.4% is an improvement but well below the target.  We saw a big jump in private wages (2.9% from Sep) seeing income growth at a 2 year high.  That is often a precursor to coming inflation.  So do they hike or not?  The market seems to think so and bonds sank last night, effectively raising rates regardless.  

But what gold investors want to keep an eye on is that ‘real’ effective interest rate – i.e. headline rate less inflation.  Even after an interest rate rise this month rates would still be historically very low.  The elephant in the room is whether these years of rampant money printing will finally, and maybe suddenly, see the inflation genie out of the bag and so cementing negative real rates.  Gold loves that.

The other elephant (it’s a crowded room) is if rates do rise, and need to rise more quickly to harness this coming inflation; what happens to servicing all that record high debt (particularly here in Australia)?

The Fed just released a report showing that (despite the aforementioned improvement in incomes) US household debt is rising 60% faster than wage growth.  How does that end well?

It’s a volatile cocktail and a difficult one for the Fed to find the balance on.  Balance your portfolio has never been more important.