The global economy is on its way to get "normal".This means all prices become fully in charge of every markets.Interest rate like others prices (Wage,exchange rate, and goods) are increasingly reflecting the effect of the so far steady economic global economic expansion. There are risks along the way such as overheating, asset overprices and market volatility, as prices start to moving to its long term path.
The economic cycle at a global scale is in motion. As economic growth get traction, it stress up labor market and wages, which add up to the firms cost, and so to its good prices. Thus the expected inflation increases and the Central Banks comes along to get in charge of the prices adjustment, to make it as soft as it is possible. This is the conventional approach.
However, the global economcy and its broad and deep links both real and financial ones, make things a bit more complicated.
a.- The missing variable :Productivity, may be higher than conventional statistical measures (out per man/ hour) are considering. Information and ideas flows, conectivity speed, faster data processing, plus knowledge sharing, and global innovation chains, make productivity higher than its limited quantitative measure. It also has a qualitative component.In other words , value become as an important part of productivity gains.-
b.- It follow that wages may goes up, but as long as the whole productivity also goes up, inflation may be more stable than expected even whether agregate demand keep its upward trend. Alternativeky, inflation may take more time to get its targeted level (2%), and overheating in the short run may have a lower probability.
c.-The financial side, is the other variable in the global economy expansion. Given its fundamental, asset prices may be higher than its real value, fostering private debts level to the higher risk zone, both in case of a sharp downward movement in agregate demand, and with the increasing probability of downward price correction, along the reinforced market anxiety related to it. Exchange rates take its share of the portfolio adjustment , some currency moving downward ,while others moving upward. Expectations may deteriorate and all of the sudden the global economy moves from expansion to a "stand by" mode, if not contraction, while the adjustment take place.
It follows that interest rate has two transmission channels: both the real(consumption and investment levels), and the financial one(asset prices and portfolio allocation).-
Current data are not conclusive about the global inflation trends.It is close to its target level (USA), and half its target (Euro zone), but it is still not a fact that the target is about to be surpassed, given that december ,january and february ,are usual months with higher demand for energy intensive goods and services, the ones with more prices increases in december 2017.
So what may be expected?.Interest rate will be the latest prices to be adjusted along this year, following a path suitable to the new developments on the real side, (higher productivity than the one which is measured),and the deeper global financial links which make the financial transmission channels to work faster.
