Tame inflation may give the world’s major central bankers a compelling argument to keep borrowing costs at record lows even as evidence piles up that the economic recovery will be more vigorous than once thought.
So far, investors seem to be giving policy-makers the benefit of the doubt that they will choose the right time to remove emergency economic supports before the flood of money triggers an unwelcome bout of inflation.
Still, the question of when to withdraw the stimulus and begin raising interest rates will grow more pressing with each new encouraging economic sign, testing officials’ resolve not to pull the plug prematurely.
The latest cause for economic celebration came Friday, when a Reuters/University of Michigan survey showed U.S. consumer confidence shot up in September, a particularly positive sign for a country that counts on consumer spending for about 70 percent of economic growth.
"Dare I say it? Whoo hoo!" was the reaction from BMO Capital Markets economist Jennifer Lee.
"With hope comes more spending and with more spending comes more production and with more production comes more hiring. But let’s take it one step at a time," she added.
Indeed, economists polled by Reuters last week saw a 30 percent chance the global economy could suffer a double-dip recession.
Finance leaders from the Group of 20 rich and developing countries were mindful of that threat when they pledged just more than a week ago to keep stimulus measures in place and work together on how to eventually remove them.
Despite the show of G20 solidarity, economists and investors are already placing bets on which central banks might break ranks. The Bank of Israel was the first to move when it raised borrowing costs in late August. Many economists think Australia may be next in line to hike.
But for the two biggest players — the U.S. Federal Reserve and the European Central Bank — no move is imminent. Data due this week should reinforce the belief that there is no reason to rush on rate hikes because inflation currently poses no threat.
Tuesday’s U.S. report on prices paid at the farm and factory gate is expected to show that costlier oil is nudging up inflation, although excluding volatile food and energy costs, economists are looking for a tame 0.1 percent rise.
A report on U.S. consumer prices on Wednesday is likely to show a similar pattern, with overall inflation up more than the core reading, which strips out food and energy.
Euro zone inflation figures are also coming Wednesday, and are expected to be quite tame, aside from oil.
GOLD BUGS AND HUMBUGS
Subdued readings on prices have not quieted those who fear that inflation is the inevitable consequence of the recent flood of public money.
Gold’s flirtation with the psychologically significant $1,000 mark last week heightened inflation talk because precious metals are viewed as an inflation safe haven. Yet trading in inflation-protected U.S. government securities shows no such tell-tale signs of worry.
In fact, some economists still see deflation as a threat, and worry that too much of the recovery is predicated on government support that cannot last forever.
Lena Komileva, an economist with Tullett Prebon in London, thinks the Bank of England may actually lower rates again in November, taking the benchmark down to 0.25 percent from 0.5 percent.
Her concern is that government and central bank largess has been "distributed quite unevenly." Banks and large, highly rated companies can borrow cheaply, but smaller firms or those with lower credit ratings are still paying punitive rates.
This week’s reports on U.S. and British retail sales for August may reinforce concerns that final demand remains weak because of stubbornly high unemployment and tight credit.
U.S. figures will probably look strong at first blush thanks to the "cash for clunkers" program that offered incentives to buy new cars. But outside of autos, sales are expected to be sluggish.
Retailers themselves still sound cautious.
The chief executive of Wal-Mart Stores Inc, the world’s biggest retailer, noted last week that consumers were less interested in buying lower-quality "throw-away" goods.
"This is the new normal. This is not something that is going to change," Wal-Mart CEO Mike Duke said.
