The world inflation picture has changed in 2016. It is hard to note that without a wry smile as there was no shortage of so-called expert opinion that when inflation headed towards zero and in some cases to below it that sang along with REM.
It’s the end of the world as we know it.
It’s the end of the world as we know it.
If we think back all sorts of downwards spirals were predicted from the lower inflation but in fact as I pointed out there were benefits such as improvements in real wages leading me to sing along with the next line of the song.
It’s the end of the world as we know it, and I feel fine.
Many workers and consumers will have been singing along with that too. Also the truth was that we were mostly seeing a relative price shift as commodity prices and in particular the oil price fell and reduced overall inflation. This was something which the Ivory Towers had told us could not happen as we apparently needed some inflation for relative price shifts to happen! Another fail for them. So let us take a look at where we are now.
The inflation base provided by services
There always was some inflation beneath the surface which was swamped by the effects of the oil and commodity price fall. Mostly it was to be found in the service sector. For example if we go back to September 2015 in the UK we see that whilst headline official CPI inflation dipped to -0.1% this was also true.
The CPI all services index annual rate is 2.5%, up from 2.3% last month.
Twelves months on in our latest reading it is in fact pretty more ignoring what has gone on elsewhere.
The CPI all services index annual rate is 2.6%, down from 2.8% last month.
A not dissimilar pattern has been found in the Euro area where is we go back to the preliminary forecast for March inflation an overall rise from -0.2% to -0.1% was accompanied by this.
services is expected to have the highest annual rate in March (1.3%, compared with 0.9% in February),
In essence services inflation has been running at an annual rate of around 1% in the euro area for a while.
If we move to the United States then last September this was reported.
The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today
However services inflation was running at an annual rate of 2.3%. A year later when headline inflation has risen services inflation is 3% and there is now focus on it although mostly because of this issue.
The index for prescription drugs increased 0.8 percent (on the month).
So as you can see in the UK and US in particular services inflation never went away and if we move from consumer measures to the wider economy that sector is of course the largest. The Euro area had the same experience but of a milder level.
The whole deflation mythology rather ignored the fact that in more than a few places asset prices were rising. In the UK that was particularly noticeable in the rise of house prices which have become increasingly unaffordable whilst the official CPI measure ignores owner-occupied inflation. But there have also been concerns about house price rises in some of Europe, China,Canada, Australia and the US.
What about the oil price?
This was the main game changer for inflation and recently we have seen it rise. Indeed from the lows of below US $30 in January we have seen the price of Brent Crude Oil rise to US $51.73 as I type this. This puts it just under 8% up on a year ago which means that as this feeds into producer prices and then consumer prices the downwards influence from it will fade and then end. We are already seeing some of this effect as for example the energy price component of consumer inflation has seen its annual rate rise from just under -9% to -3% in the Euro area.
Some care is needed here as the oil price has established something of a habit of falling in the latter part of the year. OPEC seems to be doing its best to stop that at the moment but we do not know how that will play out. Should the oil price merely remain around here then we will see the annual rate of price inflation from it rise.
These are less clear-cut because a rally in the first half of 2016 has been followed by a decline since. If we look at the CRB ( Commodity Research Bureau) Index it opened 2016 at 373 rose to a peak just below 421 and is now just below 400. There have been two quite contrary trends at play here where firstly the price of metals surged ( from 540 to 720) whilst foodstuffs at first followed this but then fell over the summer and are now lower than when they started 2016.
The US Dollar
This matters to everyone who does not have the US Dollar as their currency because the vast majority of commodity prices are in US Dollars. So this from investing.com does echo on the inflation front.
The dollar index was up 0.10% at 98.74 at 02:45 E, off a high of 98.81, its highest level since early February.
The interest-rate rise that is supposed to be driving this has been supposedly around the corner for all of 2016 but after a dip in April towards 93 the US Dollar Index has been rising since. It has even pushed the strong Japanese Yen back above 104 more recently.
Some of this is individual moves such as the post EU leave fall for the UK Pound but more generally we have seen the Euro decline a little recently and the Chinese continue to fix the Renminbi lower (6.77 today).
The winds of change are blowing through the inflation landscape as we wait to see what the main mover the crude oil price does. Whilst technically it is a relative price shift it is picked up as inflation (or disinflation), and to be fair it does trigger price changes elsewhere. How much inflation will now rise depends on what it does but as I have explained there are factors in the background where the band never stopped playing as we were supposed to be hitting an iceberg. Oh and it means I would far rather be the Austrian government and taxpayer than an investor in this. From Bloomberg.
Austria’s 30-year bund yields were little changed at 1.01 percent as of 10:32 a.m. London time…….The initial price talk for the 70-year bond sale was 60 basis points more than the yield on the February 2047 security, the person said.
So 1.6% for 70 years? No thanks after all we are living in an era of this.
Meanwhile I note that according to FT Alphaville this has been the state of play on the inflation front.
inflation predictions are back in a big way and after more than eight years of being proved wrong time and time again, the inflationistas may finally get to have their day in the sun.
Actually if we look back I was right to suggest that UK inflation would rise back in 2010 as it then on both measures ( CPI & RPI) rose to above 5%. That is an extraordinary thing to have amnesia about as via its disastrous impact on real wages it is one of the most significant phases in post credit crunch UK.
Oh and you may note that for all the hot air (Open Mouth Operations) of central bankers and indeed their QE their efforts have had very little impact here. Of course that is partly to do with the fact that they impact on asset prices which are kept out of most official measures of consumer inflation. It is also partly to do with the fact that devaluing your currency is overall a zero sum game which may give to some but also takes away from others. However this paragraph needs to come with a so far…….