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Global Inflation: Ready for Takeoff?
• The global output gap is very small and may
have closed. We look like going well beyond
capacity in the next couple of years. The fact
that capacity utilisation is very uneven raises
the global inflation threat.
Chart 1:La Niña, El Nino and Food Prices
• Commodity price shocks are likely to
continue due to the lagged effects of La Niña
and global warming, though next year some of
these effects may ease.
• Monetary policy on a global basis is too
slack, especially in Asia. US policy is amongst
the slackest. While this is appropriate for the
US, exchange rate arrangements may mean this
is imported into inappropriate settings such as
EMs.
Source: Reuters EcoWin Pro.
Chart 2:Global Output Gap
• Inflationary expectations are very low in
North America. Elsewhere, they are moderate to
high. The objective of the US is to avoid
deflation by raising inflation expectations.
Countries limiting the appreciation of their
currency are importing the Fed’s objective of
raising inflation.
• The risks of global inflation are high.
Capacity is tight, monetary policy is slack and
central banks are acting weak. The discipline of
pegging to the reserve currency is gone from
much of the world because the reserve currency
has an ultra-easy policy and is aiming to raise
inflation. The risk of a surge of inflation and a
dislocation of inflation expectations is high in
many countries.
• The key thing to watch is inflation
expectations. They have declined from their
‘scare’ levels last year but the wild swings over
the last couple of years shows they have
become unstable.
Source: Reuters EcoWin Pro, IMF and BNP Paribas
The 50bp policy hike from BCB this week is the latest
sign of concern.
How anxious should we be about global inflation and
what are the main drivers?
There are four things we would identify as important
for inflation over coming months:
• Supply shocks;
On 20 th Street and Constitution Avenue, the Fed is
worrying about disinflation, and with good reason
given the core reading of only 0.6% y/y for
December.
In most of the rest of the world, however, inflation is
increasingly bullying its way to the top of the agenda.
Mr Trichet on 13 January showed increasing
concern. The UK inflation rate looks likely to top 4%
soon. We recently saw a surprise rate hike from
South Korea on the back of inflation worries and
concerns are prominent in China, Brazil and India.
• The output gap;
• Monetary policy; and
• Inflation expectations.
Supply shocks
Supply shocks are generally difficult to predict
(though in La Niña years such “shocks” could be
expected more than they are – wet weather on the
western side of the Pacific being a frequent
occurrence in such years). We are suffering from
Paul Mortimer-Lee 20 January 2011
Market Mover
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