Yesterday the UK reported inflation falling more than analysts had predicted. It’s the latest in several countries to report the same. Earlier in the week, Canada reported an unexpectedly large drop in inflation, returning to the target range. US and Australia inflation was also less than expected. The odd one out – and perhaps because it was a quarterly figure – was New Zealand which saw inflation beat expectations slightly.
So, are we looking at a global trend? (Which could be relevant for Japan’s CPI release tomorrow, and major central bank meetings later this month.) If so, what are the factors? Can we expect similar results in the future? Or does a surprise underperformance now mean a surprise to the upside next month?
Coming to an accord
Before jumping into the figures, there is a timing issue to mention. Most central banks won’t hold an “August” meeting. Sure, there are meetings at the very start of August, so technically they do. But practically, there is about a month in which central banks take a bit of a summer break. In that time is when the Jackson Hole Symposium is held, with the participation of major central bankers.
Often, a “new direction” for monetary policy can coalesce in August. If inflation is coming down, the idea might coalesce among central bankers over the “break” that it’s time to hit the pause button. So, underperformance in the inflation around this time of the year is particularly crucial, and it would be worth carefully monitoring what central bankers say after the next round of meetings. There will be two batches of inflation data coming out before the next central bank meeting cycle.
The commonalities in the data
Now, let’s look at coincidences in the inflation data among countries that have missed inflation expectations recently. The main driver of lower prices in most was energy. In the UK the second major mover was food, and in the US it was used vehicles. Crude prices have been under pressure over the last several months, and prices have remained below analysts’ expectations.
Prices of oil have staged a bit of a recovery, but only after major supply curbs by OPEC+. Gains in energy prices in the wake of production cuts have also faded quite quickly. Forecasts for increased demand for crude this year were based on expectations that China’s economy would be rushing ahead by now. But the world’s second largest economy disappointed with GDP growth in the second quarter, despite massive government stimulus.
What does it mean for the future?
While slower inflation certainly would be a relief to most people’s pocketbooks, it might not last. We have to take base effects into account. Even if monthly inflation in the US, Canada and the UK were to remain at the current rate, annual inflation would start to rise again towards the end of the year. Inflation is still relatively strong – just not as strong as it was a few months ago.
On the other hand, the main classic driver of lower inflation is clearly having an effect. Slower economic growth translates into less consumer demand, which reduces price pressures. While it seems investors are less pessimistic about the prospect of a recession later this year, the economic indicators show that the economy is still coming in for a landing of some sort. The question now remains whether central bankers manage to judge the moment right, and don’t over or undercorrect.
