Smart investors need to remember to base their investment decisions on what they think will happen, not what should happen.
Jerome Powell, the US Federal Reserve chair, last June admitted: “We now understand better how little we understand about inflation.”
For example, during the 2010s, central banks around the world were concerned about deflation – that is, inflation being too low – so the biggest central banks cut interest rates to never-before-seen levels.The US had in effect zero interest rates between 2010 and 2016, yet inflation averaged only 1.6 per cent per year over that period. Over those same seven years, interest rates in the Euro area averaged about 0.5 per cent but inflation was -0.
That may have been an issue 50-plus years ago when more than 60 per cent of the workforce belonged to a union, but with now only 9 per cent of Australia’s private sector in a union, things have changed. Wage increases have been below the CPI for the past nine consecutive quarters in Australia and real average hourly earnings in the US declined by 1.3 per cent over the year to February, meaning it has been a deflationary influence in both countries.
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