Delta variant cools inflation fears
To get a sense of where inflation is heading, you could peruse mountains of data, charts and investment bank reports. Or you could just examine central bankers' travel schedules.
A resurgence of Covid-19 cases just forced the US Federal Reserve to cancel its annual in-person Jackson Hole, Wyoming retreat. Each year, monetary bigwigs from Washington, Frankfurt, Tokyo, Sydney and everywhere else gather in the mountains to mull the big economic quandaries of the moment.
This year, of course, the debate is over whether inflation is about to explode and cream markets as economies reopen from pandemic lockdowns. Yet the cancellation of conference rooms in Wyoming it's now a Zoom meetup - suggests a non-panic attack.
On inflation, at least.
With blistering speed, the debate has pivoted from runaway inflation to fresh Covid-19 waves necessitating more monetary easing. And, for that matter, fears that central banks would spend the rest of 2021 tightening.
"The key reason is the subdued inflation outlook," says economist Stefan Angrick at Moody's Analytics. Sure, inflation could flare up at any moment. And given the last several months, during which US consumer prices suddenly jumped 5%-plus year-on-year, the threats were real.
But as Delta does its worst and other, even scarier, variants emerge, and as advanced countries' vaccination drives, that had looked so rosy so recently, start to wobble, central bankers are pivoting back to the big debate of 2019: Japan.
In the pre-Covid era, the question was which large economies might face a scenario where they fall and can't get up again. That's been Tokyo's plight for decades now, and it could extend to economies from the US to the UK to Europe to South Korea to China - really, anywhere - this year.
At a minimum, this means today's inflation worries need a serious reality check. It's not that deflation is afoot. But the return of slack in labor and product makers may prove more troublesome, particularly as these dynamics become more and more ingrained.
The overhang of 2020's trauma to consumer and business confidence is now colliding with fresh uncertainty about where growth and employment levels might be in 2022. This augurs poorly for pricing power, regardless of what happens with supply chains and key commodities getting scarce.
Some economists are less sanguine. Count Maurice van Sante at ING Bank among them. He thinks we are in a for a bumpy ride for a while to come.
"It will take at least until the summer of 2022 before we expect the price of some building materials, notably concrete, bricks and cement, to drop," he says. "Construction firms' suppliers first need to improve their historically low levels of inventories. The price of timber and steel will probably settle down earlier."
It's here where the lessons from Japan may be particularly relevant. The biggest of those lessons, perhaps, is that it's easier to cap inflation than revive an economy that's settled into a negligible growthzero inflation. Since the late 1990s,
Japan has been struggling to generate inflation, any inflation. And largely without success.
In March 2013, then-Prime Minister Shinzo Abe hired a new Bank of Japan governor to turbocharge Tokyo's effort to restore pricing power.
Haruhiko Kuroda came in fully armed, firing the first of a series of monetary "bazooka" liquidity shots into the banking system. For a time, those blasts drove the yen down 30% versus the dollar and euro, boosting exports and corporate earnings.
In 2013 alone, the Nikkei Stock Average soared 57%. Over time, the Kuroda BOJ cornered the government bond market. So ginormous were its purchases that it's not uncommon for no bonds to change hands at all during entire trading sessions.
Then, the BOJ's stock hoarding via exchange-traded funds made Kuroda's team the largest holder of Nikkei shares, even topping the huge Government Pension Investment Fund.