BIS chief says era of low inflation may be over


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  • I wonder what his first clue was?

Agustín Carstens is the Director General of the Bank for International Settlements. Report via The Wall Street Journal (closed)

  • We may be at the dawn of a new inflationary era
  • The forces behind the high inflation

    Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general price level where a given currency is effectively buying less than it has in previous periods. In terms of valuation of strength or currencies, and by extension foreign currencies, inflation or its measures are extremely influential. Inflation stems from the global creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (measured with GDP). This thus generates pressure from demand on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare the different purchasing power of each country according to the general level of prices. By doing so, it helps to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates in the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on the exchange. Conversely, too low inflation (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the foreign exchange market.
    Read this term could persist for some time. New pressures are emerging, notably in labor markets, as workers seek to offset inflation-induced reductions in real income

  • some of the structural disinflationary winds that have blown so strongly in recent decades may also be fading
  • In particular, there are signs that globalization could be backtracking

Emerging market central banks are already grappling with rapidly rising inflation.

Carstens was speaking at the International Center for Monetary and Banking Studies on Tuesday

Carsten

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The Bank for International Settlements:

  • is an international financial institution owned by central banks that “promotes international monetary and financial cooperation and serves as a bank for central banks”.

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