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Inflation makes an appearance

Published Friday, February 27th, 2015

Janet Yellen drew attention to the importance of the rate of inflation in determining the timing of the first interest rate rise in her testimony to Congress earlier this week. Hence the importance attached to yesterday’s data release on US consumer prices. The Consumer Price Index fell 0.7% in January but when energy and food are excluded “core” inflation rose by 0.2% over December. Year-on-year core inflation rose by 1.6%.

It is the core figure that the Federal Reserve is focused on, so Wednesday’s sentiment that interest rates would not rise until the Autumn was dialled forward again yesterday to the summer, which pushed the dollar index and Treasury yields higher. In contrast, over in Europe, the start of QE next week has created a surge in bond buying pushing down yields to record lows. QE may do very little for growth but it is doing wonders for government borrowing costs and therefore budget deficits.

Given the shortage of eligible bonds in Europe and the volume the ECB is committed to buy, even at negative yields, yesterday’s buyers see an open goal opportunity to make a quick turn. Yesterday the 10-year Bund fell to a record low of 0.28%

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Posted by David Hufton