US Treasury Secretary Janet Yellen stated on Thursday that surprisingly strong economic growth in the fourth quarter was a “good thing” that indicates productivity gains and healthy spending without an increase in inflationary pressures.
Key quotes
“I see this as a good thing, reflective of strong, healthy spending and productivity improvements and not, most likely, creating an inflationary challenge.”
“Q4 GDP data driven by strong, healthy spending’ and productivity improvements.”
“It may be that we’re having a period of more rapid productivity growth than we’ve seen as a long-run average in recent years for the US.”
“Some goods prices are falling and there is continued moderation in wage growth, which is important for controlling the prices of services.”
“It is unclear if recent productivity gains are temporary, too soon to speculate on the impact of artificial intelligence on productivity.”
“To me, more output is a good thing if it doesn’t signal worrisome pressures in the labor market.”
Market reaction
These comments do not seem to have a major influence on risk mood. As of writing, the US Dollar Index (DXY) is trading at 103.53, adding 0.05% on the day.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Source: https://www.fxstreet.com/news/us-treasury-sec-yellen-strong-us-gdp-growth-signals-productivity-gains-not-inflation-202401260018