Disinflation and a New Monetary Easing Cycle
Explaining disinflation. The precipitous fall in the price of oil and slowing growth has put downward pressure on headline inflation. Emerging market (EM) economies have experienced a near uniform drop in inflation except for a small number of countries, most prominently Brazil and Russia. In Brazil, higher regulated prices (mainly transportation and energy costs) have kept inflation stubbornly high. In Russia, lower oil prices and sanctions imposed over Ukraine have driven down the value of the ruble and caused inflation to rise.
Central banks react. As inflation falls, real interest rates rise. Central banks worldwide have responded by reducing interest rates. They have done so in Chile, China, Greece, Hungary, India, Korea, Mexico, Peru, Poland, Russia, Thailand and Turkey.
Will the cheaper cost of borrowing benefit EM? Not just yet. Usually interest rate cuts are supportive of economic growth and stock market performance, but EM central banks have kept the real rate of borrowing constant, so the net stimulus to the real economy thus far has been negligible. However, lower interest rates may help export competitiveness through currency weakness. We believe EM needs a combination of continued reforms and more aggressive central bank stimulus, which should help stabilize growth.
Definitions
The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is sometimes referred to as headline inflation.
Headline inflation is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes, such as food or energy.
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EGA and EGShares Funds are distributed by ALPS Distributors, Inc. Emerging Global Advisors acts as the investment advisor to the EGShares Funds. ALPS and Emerging Global Advisors are unaffiliated entities.
Emerging market investments involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, from economic or political instability in other nations or increased volatility and lower trading volume. Please call +1 888 800 4347 or click here access a prospectus online. Investing involves risk, including possible loss of principal.
Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses, which could reduce returns. Indexes are unmanaged and one cannot invest directly in an index. Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance data may be higher or lower than actual data quoted. For the most current index performance data please call + 1 888 800 4347.
The content of this material is presented for general information purposes only. The statements and opinions expressed are those of the author and are as of the date of this material. All information is historical and not indicative of future results, and subject to change. Readers should not assume that an investment in the securities mentioned above was or would be profitable in the future. This information is not a recommendation to buy or sell. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and it should not be relied on as such or be the basis for an investment decision. This material may include estimates, projections and other "forward-looking statements". Emerging Global Advisors, LLC assumes no duty to update any such statements. Due to numerous factors, actual events may differ substantially from those presented. Past performance does not guarantee future results.
EGA and EGShares Funds are distributed by ALPS Distributors, Inc. Emerging Global Advisors acts as the investment advisor to the EGShares Funds. ALPS and Emerging Global Advisors are unaffiliated entities.
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