What are the prospects for inflation ( and hence wages )?

Yesterday saw a revealing insight into the establishment view of inflation. The world economic outlook of the International Monetary Fund was in general upbeat and positive but I noted this.

The outlook for advanced economies has improved, notably for the euro area, but in many countries inflation remains weak, indicating that slack has yet to be eliminated

You may note that it ignores the possible link between lower inflation and better economic growth in its rush to tell us that inflation below some arbitrary target is a bad thing. It really is old era economic thinking to say that low inflation is a sign of slack in the economy as well. Missing also is any thought that growth and inflation are being measured badly and that perhaps we have more inflation ( for example by factoring in one of the largest parts of any budget which is housing) and less growth than the IMF would like us to believe.

The same muddled thinking is evident in this excerpt as well.

Persistently low inflation in advanced economies, which could ensue if domestic demand were to falter, also carries significant risks, as it could lead to lower medium-term inflation expectations and interest rates, reducing central banks’ capacity to cut real interest rates in an economic downturn.

Central banks capacity to cut interest-rates was mostly reduced by them cutting them so much already! If that was the weapon implied here why would they need to do it again? Also as we know some central banks have been willing to employ negative interest-rates. If we move on in a word of low wage growth then most people would welcome low inflation and low inflation expectations. If we put this another way the IMF is skirting over the implication below in its view on asset valuations.

In advanced economies, monetary policy should remain accommodative until there are firm signs of inflation returning to targets. At the same time, stretched asset valuations

What are the inflation prospects?

So far in 2017 headline consumer inflation has been really rather low. For example the CPI in the Euro area is at 1.5% and the US CPI is at 1.9%. There was something of a warning though in the latest US data if we look at some of the detail.

Increases in the indexes for gasoline and shelter accounted for nearly all of the seasonally adjusted increase in the all items index. The energy index rose 2.8 percent in August as the gasoline index increased 6.3 percent.

So let us look at the oil price trend.

Crude Oil

If we look at the price of a barrel of Brent benchmark crude oil then we see it has been rising since late June when it dipped below US $45 per barrel as opposed to the US $56.62 as I type this. There have been various factors driving this of which one has been the economic growth described by the IMF. In addition there has been this factor according to Reuters.

A pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia to cut output by 1.8 million barrels per day (bpd) in order to prop up prices is due to expire by the end of March 2018. Discussions to extend the pact are taking place, but production elsewhere is rising.

There has been doubt as to how the OPEC deal has actually held but from its point of view the last 3 months or so have been a success as the oil price has risen. The other factor is the shale oil wildcatters in the United States who will also be benefitting from the higher price for crude oil as we wait to see if they expand output. If you recall the cash flow business model for the shale oil wildcatters then 2017 has been a good year as income will have been strong as we note higher prices are being accompanied by this.

U.S. producers are not participating in any pledge to restrain supply, and output has risen by 10 percent this year to over 9.5 million bpd.

Other Commodities

Reuters calculates a commodity price index which is currently at 183.2 which is just under 4% lower than a year ago albeit like in the oil price there has been a rise since late June. Back then it had dipped to 166.5. If we look at the index which excludes energy prices we see that there is a familiar if more subdued pattern as it has risen from just below 116 to 123.6 now.

If we look at metals prices we see Metal Bulletin reporting this today.

The underlying trends in the base metals are upward but those metals in or near high ground seem to be having to absorb selling which is capping the upside, while copper and nickel prices that are still some way below the highs seem to be having an easier time working higher, but neither seems in any rush. We remain quietly bullish, but expect trading to become choppier as prices run into more bouts of scale-up selling.

Dr.Copper had seen quite a surge as a year ago it was US $2.17 as opposed to the US $3.06 now as we wait to see the next move. I guess churches will be nervous about their copper pipes and roofs again. By contrast the Iron Ore price has been heading south at a rapid rate recently and this morning has fallen below the US $60 mark.

Benchmark Australian iron ore fines dropped 4.1% Tuesday to a three-month low of $59.1 a tonne, based on data provided by The Steel Index, taking losses since the start of September to more than 20%. ( Mining.com)

They attribute the fall to this factors.

Iron ore prices continued their downward trend Tuesday amid ongoing concerns that looming steel production cuts in China on environmental grounds will sap steel mill demand……..At the same time, supply from Australia — the world’s No. 1 iron ore producer — has risen,further pressuring prices.

Food Prices

The United Nations calculates an index for this.

The FAO Food Price Index* (FFPI) averaged 178.4 points in September 2017, up 1.4 points (0.8 percent) from August and 7.4 points (4.3 percent) above September 2016. Firmer prices in the vegetable oil and dairy sectors were behind the small month-on-month rise in the value of the FFPI.

So a rise overall which is influenced by the 27% rise in dairy prices over the past year as we note the influence of the butter shortage. Mind you if you have a sweet tooth and are a Maroon 5 fan the news is much better as the sugar price has fallen by 33% over the past year.


We see that there has been a nudge higher in the beginnings of the inflation food chain over the past 3 months or so. Much of this has been the higher oil price but there have been rises in some metal prices too although not Iron Ore. However whilst the trend is low especially for this stage in the economic cycle it can still be damaging. The rising cost of one of the basic essentials ( housing/shelter ) in many places is mostly ignored and at other times claimed as growth. Secondly the fact is that wage growth is overall low too so that pockets of real wage growth are also much less abundant that we would usually expect in a boom. If the IMF gets the inflation it seems to want there is no guarantee that wages would rise as well so it would have made us all worse off.

So in essence if we look at food and energy prices they are the major players in the consumer inflation measures we have and of course the central banks and IMF try to ignore them as “non-core.” Oh well…….


12 thoughts on “What are the prospects for inflation ( and hence wages )?

    • Hi screamoutsite

      I think in many cases that is true. They are afraid that if they put interest-rates up even a little then the gains they have claimed will disappear. After cutting them by ~5% they are worried about what even 0.5% going the other way would do. To be fair to the US Federal Reserve it is at least giving it a go.

  1. What a bind central bankers have put themselves in, inflation is low despite nearly a decade of zero interest rates and QE, wage growth is almost zero and so consumers have no purchasing power. Companies have no pricing power as there is simply too much competition as zero interest rates and bond buying has created an artificial market that allows zombie companies to survive that should have gone bust years ago, if they weren’t around the more efficient companies could raise prices(and possibly wages???).Consider comapny A, well run, profitable, good products almost zero debt, but has a competitor – company B, badly run, poor products, losing money, balance sheet loaded with debt, issues bonds to shore up the balance sheet and agressively expand. ECB has aprogram of buying company bonds regardless of their fundamnetals; buys bonds of company B allowing it to gain a competitive advantage over company A who now struggles and goes bust. Is this how capitalism is supposed to work?

    The central banks are now total hostages to the stockmarket and the housing markets, if they try and raise rates they will crash, if they don’t, the real economy will continue to stagnate and the bubbles created in the financial markets will grow further.

    They have two choices in my opinion, they can carry on as they are and eventually the bubbles will burst of their own accord and devastate the economies around the world, this time governments will be going bust and major currencies will fail. Or they will do helicopter money or some derivative of it(universal basic income).
    Helicopter money will do nothing to solve the problem, as by then the currencies of the countries affected will be being decimated so any fresh money distributed wil lose its value before it gets to the recipients.

    The problem is that once spent, the helicopter money is gone and there follows louder and louder cries for more and more as prices go up faster than the money distributed, as the problem is seen as a “shortage of money” rather than a failing currency losing value, politicians will willingly order central banks to print up a fresh new batch of money. This adds to the downward pressure on the currency so it buys less, leading to demands for even more helicopter money.

    This is nothing new, it has always followed this cycle, Ludwig Von MIses spent his life warning about the dangers of the very policies governments and central banks have been following for the last forty years(mainly excessive credit growth), but the economists advising central banks and government are all Keysian/neo liberal economists who just cannot see the problems as they really are.

    For me, politicians will choose helicopter money next.

    • Kevin, an insightful comment. I agree with you the next steps will be un-conventional and, as you argue there is no choice. IR rises will crash housing and stocks so where to go….?

      Personally, I would side with Steve Keen’s “debt jubilee”, at least that forces the helicopter money to eradicate some of excess debt.

      • Yes it’s a brilliant plan that would return housing to what it should be – place to live, rather than a speculative investment with political leverage. And that together with the fact there would be little future growth in mortgages, means it will never be allowed to happen.

    • Company A may itself choose to issue bonds thereby financing itself sufficiently to undercut company B and the consumer benefits in the short term at least Ultimately, you can’t deny inefficiency. In your scenario you describe the making of an oligopoly where the market is eventually dominated by a few big players who then rig the market via price fixing and the consumer suffers.

      Central Banks have been hostage to the housing market since before the second world war and Keynes never advocated continuing public borrowing when the economy moved away from recession/depression.

  2. Hello Shaun,

    Forgive me but there’s been plenty of inflation – its just not counted , and I do leave out housing costs too!

    Over 5 years food and utilities , with rail prices too , have done stunningly well , 20-25% up

    wages , not so but then if yer in the top 1% yer laffing !

    so Ipads are cheaper? and iphone(y) well wasnt that $1000 this year – for a phone ??

    no doubt the imputers will be very busy talking away the price hikes ….

    ( can you really say that “improved” or “value -add ” if you customers don’t or cannot use the extra so called features ( most useless ones ) in real life?


    • Hi Forbin

      The “improvement” issue is a big one as how do you quantify that and what about someone who only uses basic functions? The truth is that the statisticians do not know as was highlighted when I looked into the issue of ladies coats about a year ago. The protestations of quality measurement disappeared when I asked how they measured it?!

      On one hand I had sympathy as keeping up with ladies fashion is not the easiest of tasks although they must be able to find someone for him this is a sort of dream job. But on the other hand it is important as back in the day it was the measurement of clothing and footwear inflation back in 2009/10 that set the UK ONS on its recent disastrous changes to inflation measurement.

  3. Shaun, down in Spain today. Looking for destablising of the Catalans, but in the Basque country, another part who might wish to be secessed! Nothing to see except some drapedcatalan flags in solidarity at a personal level.

    On fuel though, I’ve been filling my red italian sports car. Spain today €1.10 which I thought was excellent, that is £1.00 France not so good as €1.28. Both Euro countries compare well to the UK at circa £1.20. So is Oil higher in price now?


  4. Since we have had a global labour pool for a couple of decades now, of course there is ‘slack in the economy’ as traditionally measured but on a different geographic definition. Until that arbitrage disappears things won’t change…either that or ‘walls’ will be built to reinstate them.

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