Wednesday, 17 September 2014

Inflation stays low in US and UK even as asset markets look frothy

Reports on Tuesday suggest that US inflation is likely to stay low for the near term.

US producer prices were flat in August. Prices were restrained by falls in the prices of gasoline and food.

In addition, US median household income edged up just $180 last year to $51,939.

Across the Atlantic, a report on Tuesday showed that UK inflation eased to 1.5 percent in August from 1.6 percent in July.

However, while consumer price inflation has been muted in most economies, asset prices have been rising rapidly.

Another report from the UK on Tuesday showed that house prices rose 11.7 percent in the year to July, the fastest rate of increase in seven years.

This report comes in the wake of the Bank for International Settlements’ quarterly review, which had noted “elevated asset price valuations and exceptionally subdued volatility” around the world.

A recent Bloomberg report says that an emerging-market bond fever is worrying the BIS, whose report noted that yields on developing nations’ 10-year local-currency bonds fell to about 5.8 percent at the end of August, about 0.5 percentage point less than February levels.

The flow of money into emerging-market assets could be potentially destabilising.

Investors tend to move in herds in these markets, “accentuating both booms and busts,” BIS analysts Ken Miyajima and Ilhyock Shim wrote in a report this month. While foreign investors may boost growth now, “this comes at a price,” they wrote.

But there is potential for instability in the US as well.

Sober Look noted last week that “US middle market leveraged buyout (LBO) transactions are becoming increasingly frothy”, with data showing that “risk-return fundamentals in the space are worse than they were in 2007”.

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