By Steve Johnson at Financial Times
Everybody knows the world is battling against extremely low inflation, with central banks in the US, UK, eurozone and Japan having spent trillions of dollars on quantitative easing in an attempt to fend off the spectre of deflation.
The latest leg down in oil prices to below $30 a barrel has reignited such fears. But even stripping this out, central banks across much of the world (with the notable exception of the US) are so worried about a perceived lack of domestic inflationary pressures that projections of future monetary policy are becoming ever looser.
Yet inflation, by one key measure at least, is not low at all. In fact it is rather high.
Global core inflation, which strips out volatile energy and food prices, and is thus a better gauge of domestic inflation pressures than the headline number, is currently running close to historic highs.
At 2.4 per cent in December, this measure of inflation has only been higher once since 2000 — in July-September 2008, when it peaked at 2.5 per cent, according to calculations by JPMorgan, as the first chart shows.
Earlier this week the Bureau of Labor Statistics said US core consumer price inflation rose to 2.1 per cent in December, its highest level since July 2012.
This is despite a 24.4 per cent jump in the dollar index, a measure of the greenback’s strength against a basket of currencies, since June 2014, a rise that would be expected to reduce the price of US imports, putting downward pressure on inflation.
Moreover, core inflation has risen even though weak oil prices have led to lower prices for some elements of the core CPI basket, such as airline fares, which fell 1.1 per cent in December, notes Harm Bandholz, chief US economist at UniCredit.
Despite the elevated US reading, David Hensley, a JPMorgan economist, says the core inflationary pressures in developed economies are “low to moderate”.
Instead, the unusually elevated global core inflation levels are being driven by trends in emerging markets.
In countries such as Brazil, Russia, Turkey and, to some extent, South Africa, “extreme currency pressures” are pushing inflation higher, as falling currencies raise import prices.
It is important to note that, while true, this cannot explain the unusually high global core inflation reading. Foreign exchange markets are a zero-sum game, so currency weakness in some countries (and thus a tendency towards higher inflation) must be balanced by currency strength (and thus the likelihood of lower inflation) elsewhere.
Mr Hensley also points to the impact of tax increases “that are associated with [economic] stress and are transitory [in their affect on inflation]”.
Stripping out these countries, Mr Hensley says core inflation levels across the rest of the emerging world are “kinda average”.
However, this finding may be more interesting still. “Emerging market growth rates have been slowing year by year. They are creating slack and should be seeing core inflation rates coming down and that is not happening,” says Mr Hensley, who argues that this “stubbornness” in inflation is a major issue for EM governments to tackle.
According to JPMorgan, this stickiness in inflation is particularly prevalent across Latin America, which the exception of Mexico and Asia, excepting India and Indonesia, while there are also pockets to be found in the eastern Europe, Middle East and Africa region.
Mr Hensley cites the example of Brazil where, even in periods when a plunging currency is not pushing up import prices, the country suffers from “very high wage inflation and an embedded inflation problem that is to some extent mirrored across Latam”.
For instance, between 2009 and 2011, when the real rose 30 per cent against the dollar, pushing down the prices of imported goods, inflation was still around 5-6 per cent.
JPMorgan does expect global core inflation to dip marginally in the coming months, reaching 2.3 per cent by the year end, although this would still be “near the high end of its range over the past 15 years”.
However, the US bank expects to see a “sharp rise” in headline consumer price inflation in the second half of 2016, “based on the simple arithmetic that, as long as oil prices do not fall another 40 per cent, this downward pressure should fade quickly,” as the impact of the earlier slide in energy prices drops out of the inflation equation.
JPMorgan expects global inflation to bottom at 1.5 per cent in June, but hit 2.6 per cent by December, as the first chart indicates.
Analysts at RBC Capital are also expecting higher headline inflation, with price pressures in the US strong enough to usher in four interest rate rises this year, compared with the two currently priced in by the market.
More broadly “the majority of commodity importers may experience a more significant increase in headline inflation, between 100 basis points and 200bp,” says Daniel Tenengauzer, head of EM and global FX strategy at RBC.
Like JPMorgan, RBC sees inflation being particularly notable in emerging markets.
Based on its analysis of past inflation trends, RBC forecasts that, over the course of the next 12 months, inflation will rise from 1.7 per cent to 2.8 per cent in China, from 5.6 per cent to 7.3 per cent in India, from 2.1 per cent to 3.7 per cent in Mexico and from 0.9 per cent to 2.9 per cent in Hungary, as the second chart shows.
Countries that are currently suffering deflation of between 0.7 and 0.9 per cent, such as Israel, Poland and Thailand will instead be seeing inflation of 1.7 per cent, 2.2 per cent and 2.3 per cent by December, it predicts.
RBC does foresee a fall in inflation in a minority of major emerging markets, such as Brazil and Russia, where inflation is currently in double digits, and Turkey, where it is 8.8 per cent.
Overall though, Mr Tenengauzer foresees a higher overall trend in inflation, with particular concerns over India, where he fears the central bank may not react to higher inflation, and Turkey, which may now have missed the opportunity that low oil prices afforded it to bring inflation down towards the central bank’s 5 per cent target.