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The Relationship between U.S. Inflation and Overseas Markets

Overall inflation in the US is currently running at about 1.5%, still less than the 2.0% target that the Federal Reserve shoots for. Fairly or not, many equate a decrease in inflation enough to cause deflation, with a recessionary environment or economy. While low inflation is not in and of itself bad, when it gets too low it provides less room to avoid a spiraling effect towards deflation in the event some sort of macroeconomic shock occurs. The problem becomes more complicated as the US economy becomes more dependent on the world economy. True, while slow and plodding, it is generally agreed that the US economy is on the mend. However, the specialized calculus as determined by different economists can sometimes result in confusing results when different estimates of the relevant factors are used in the equation. This is why the stock market has been behaving in a more volatile way recently, with large swings in valuation even within a 1 day period.

More directly, what situation would we be in if inflation dropped a mere 0.5%, due to multiple threats overseas such as a possible slide back into recession by Europe, coupled with a decreasingly inflationary environment in China, the so called “manufacturer to the world”.

It is also unclear, given the different strategies employed by the Fed by multiple attempts to stabilize the economy over the last 6 years, what the Fed can effectively do if called-upon to act once again. Our lives in some ways have never been more complicated, to the extent that the macroeconomic forces impact each of our microeconomic lives.

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