The Jerusalem Post

Getting to the core of global inflation

- • By ROSS FINLEY

LONDON (Reuters) – Stock markets have spent the year rising on bets of a resurgence in inflation, while central bankers trying to manage the global economy have spent the same time repeatedly reassuring everyone it’s just around the corner.

Policy makers gathering at an annual monetary retreat in Jackson Hole, Wyoming, this week no doubt will be collective­ly pondering why the textbook rule that says low unemployme­nt leads to labor shortages, then higher wages, and then in turn higher inflation, isn’t working.

Yet the global economy is growing strongly. Apart from the risk of a stock-market correction, there is no evidence of disinflati­onary threats like those that emanated from the financial crisis that started to smolder a decade ago.

The latest Reuters Polls of more than 500 economists covering more than 45 economies around the world showed almost no move in inflation expectatio­ns since the start of the year.

In the United States, where the Federal Reserve is raising interest rates, inflation pressures are in an extended lull, which has led to contorted arguments trying to explain it away.

Societe Generale senior US economist Omair Sharif, in a recent note titled “All my exes,” criticizes a recent tendency to search for suitably favorable core measures of inflation – stripped of, or “ex,” whatever components are holding it down.

“In short, while the core CPI undoubtedl­y looks better when you strip out sizable price declines, all these ‘ex’ measures still show a softening in the core rate that began in January,” he wrote. “Moreover, as we have noted before, the transitory excuse is long past its sell-by date.”

Analysts who follow the European Central Bank have been equally disappoint­ed that after spending €2 trillion or so buying mostly government bonds it’s only running 1.3% euro-zone inflation, still well below the 2.0% ceiling. Some measures of core inflation are even lower.

Pictet economist Frederik Ducrozet has taken heart from a recent trend move higher in the “super core” euro-zone inflation rate, which excludes the cost of package vacations.

The trouble is, the euro is on a tear higher. That is a reflection of vastly improved economic performanc­e by many euro-zone economies this year. But as the common currency climbs, it acts as a drag on exports and tamps down imported inflation.

Flash euro-zone purchasing managers’ surveys this week are likely to show continued strong business activity but with tame price rises.

ECB President Mario Draghi, who famously sent shock waves at a speech in London one month before the Jackson Hole summit five years ago, proclaimin­g he would do “whatever it takes” to save the euro, will not be making major policy comments. To some, that underscore­s how little progress there is to discuss.

“This in itself suggests that the Governing Council remains to be convinced that it should announce its QE tapering plans at its next meeting [in] September,” Investec economist Victoria Clarke said.

Fed Chairwoman Janet Yellen will also speak. However, with minutes from the Federal Open Market Committee’s latest deliberati­ons showing concern about soft inflation, she is not likely to give new guidance on policy.

Indeed, arguably the biggest influence on US inflation in the near term is completely out of the Fed’s control.

Come September, the reality may hit that prospects for sweeping US tax cuts, one of President Donald Trump’s biggest election promises and the basis of a surge in business confidence since he won the White House, have stalled.

If the stock market gets a chill, the Fed may no longer be able to rely on an argument regularly touted by New York Fed President William Dudley that looser financial conditions justify the case for tighter monetary policy.

But the weak inflation trend is not confined to the United States, Europe and, of course, Japan. With few exceptions, national statistics show inflation remains low just about everywhere.

India, forecast in the latest Reuters polls to be the world’s top-performing economy this year with more than 7% growth and also an economy notorious in the past for running persistent­ly high inflation, reported inflation hit a record low of 1.54% in June.

The Reserve Bank of India cut interest rates into that roaring strength the same month inflation hit a record low.

South Africa, emerging from recession, is running inflation below historical averages, and its central bank may cut rates again as soon as next month, most likely by November, according to the latest Reuters poll.

Even in Brazil, which is beginning to emerge from its worst recession in about a century, inflation has crashed from more than 11% last year to below 4%, leading the central bank last month to lower its inflation target.

 ?? (Brendan McDermid/Reuters) ?? TRADERS WORK on the floor of the New York Stock Exchange last week. Apart from the risk of a stock-market correction, there is no evidence of disinflati­onary threats like those that emanated from the financial crisis that started to smolder a decade ago.
(Brendan McDermid/Reuters) TRADERS WORK on the floor of the New York Stock Exchange last week. Apart from the risk of a stock-market correction, there is no evidence of disinflati­onary threats like those that emanated from the financial crisis that started to smolder a decade ago.

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