It’s Not Dead, It’s Resting

21/11/2014 at 4:32 pm

Today has been dominated by news from the world’s central banks. First, Mario Draghi gave markets a boost by announcing that the ECB would take action to increase inflation and inflation expectations, which he described as “excessively low.” Then, with the eurozone Stoxx 50 index already up by more than 1%, the People’s Bank of China said later in the morning that it was cutting interest rates with effect from tomorrow. At the time of writing, the Stoxx 50 is up by almost 3%, with markets around the world also enjoying a boost, from equities to oil to industrial metals. Bond markets are up too; after all, all this has to do with lacklustre demand and low inflation – all good, bond-positive stuff.

Now growth of 0.8%, which is what is forecast for the eurozone this year, is sub-trend even for the sclerotic economies of the Continent, so low inflation is not really a surprise. Elsewhere, however, there has been quite a lot of other news on prices out this week with a different tone.

This Tuesday we had the October CPI and RPI data out here in the UK. Headline numbers were a little firmer than expected, with CPI up 1.3% on the year as against expectations of a 1.2% rise. RPI ex mortgage interest payments – the old monetary target measure – also surprised somewhat, up to an annual 2.4% from 2.3% in September. Part of this was to do with transport costs, but another reason was also due to rising prices for toys and computer games in the run up to Christmas.

This might seem rather dry and the numbers immaterial. But it is the last point which ought to raise an eyebrow. There is clearly sufficient consumer buoyancy in the UK market just now to allow retailers to increase some prices – good, old-fashioned supply and demand at work. This might well be connected to the fact that the economy has been growing, house prices rising and the unemployment rate falling. Indeed, at 6%, unemployment has already dropped by more than 1% this year alone and is 2.5% below its 2011 peak.

Then on Thursday we had CPI numbers out from the US. The headline rate, which had been expected to fall, remained constant at 1.7%, while the core rate (which excludes food and energy prices) ticked up a little to 1.8%, all of which surprised markets. Interestingly, the “recreation” component of the index – which includes video and audio products – was again one of the reasons. And again, we know that the US lies at the more robust end of the growth scale across developed economies, and that unemployment has fallen to 5.8%, with 2014 already showing the fastest drop for any year since the rate peaked at 10% in 2009.

Rounding the theme off, this afternoon it was Canada’s turn. The headline CPI change on the month, which had been expected to fall with weaker energy prices, actually rose, bringing the annual rate for October up from 2% to 2.4%. The core rate – which in Canada’s case excludes eight “volatile” items, plus indirect taxes – also increased from 2.1% to 2.3%. Price inflation has been gathering steam in Canada significantly this year, up from only 1.3% on the core measure at the end of 2013, and here the sectors responsible ranged from shelter to transportation to food and clothing.

One might go so far as to say that there are two conflicting themes visible in this area at present. On the one hand there is Europe and Japan, each with their own problems, each battling low growth and each trying to ramp up inflation. On the other hand there is the UK, the US and the rest of the dollar zone, where activity has been stronger for some time, labour market slack has reduced and inflation, while not yet problematic, is certainly not problematically low.

With the Brent crude future down by almost 30% since the middle of the year it is difficult to get worried about inflation just now. But there are signs in some major economies that the massive disinflationary impact of the Great Recession is now over. Some people still worry about the next banking or property market crash just like the one they witnessed a few years ago – who knows, in China, perhaps? – and perhaps they are right to do so. Those who worry about prices today generally seem to worry about them falling, focused as they are on the euro-Japanese side of things.

Still, it is the shocks from left field that cause the most excitement, and uncomfortable levels of inflation on the UK-US-dollar zone side of things would fit that bill. (Markets are not expecting policy to be tightened in Britain, the US or Canada until next September at the earliest.) As John Cleese pronounced in Michael Palin’s shop during the famous sketch, inflation might well be definitely deceased and bereft of life. But just imagine what a surprise it would be for an audience if the dead parrot prop suddenly squawked to life and flew out the shop window.


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