Market Overview

Inflation Moderating Around the World

On Friday, the Canadian consumer price index printed at less than expected, coming in at negative 0.6% against an anticipated drop of 0.1%.

The prior month's CPI reading was an increase of 0.1%.

Canada's drop in inflation echoes trends seen around the globe. Although headline inflation in the US continues to increase at a modest pace, core inflation has held tight for some time and has decreased from relative highs seen in the summer.

Earlier in the week, CPI figures released in the Eurozone indicated that inflation had receded, although it remained sharply above 2%. Likewise, inflation figures in China had recently shown a declining trend.

This leads to an increasing amount of speculation that more easing could be incoming. Including in the US, where it seems more and more likely that the Federal Reserve will implement a third round of quantitative easing.

In China, investors may have become convinced that further easing is a guaranteed certainty. Chinese stocks have rallied tremendously in the wake of comments made by the People's Bank of China, who promised that they would work to help keep their economy growing.

Inflation may be declining due to commodity price pressures being relieved. This is in line with what the Federal Reserve's chairman Bernanke had predicted in early 2011.

The fall in commodity prices may have been due to a shift in the sentiment of investors, who may have become more concerned with the prospect of deflation once again.

As pressures have mounted in the Eurozone, the possibility of a severe financial crisis has emerged. With ratings agencies downgrading multiple countries in the Eurozone, and a default in Greece looking increasingly likely, deflationary pressures could rule the day if major financials begin to break down.

The US dollar index bounced early on Friday, but has been trading lower all week. Should the dollar continue to weaken, higher inflation rates could return.

Where does the inflation rate go from here? If central banks in Europe, the US and China aggressively ease in the face of moderating inflation, that inflation could quickly return with a vengeance.

Yet, without easing, economies could contract and deflation could rule the day.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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