Tuesday, March 20, 2012

Global Inflation

Yesterday, for the first time in a very long time, I raised the prospect that inflation could be a problem that we need to monitor more closely. I started my career in the late 1970s when inflation rose to record highs in the US. Ever since the early 1980s, I’ve been a disinflationist. I was also a long-term bond bull as a result. When the 10-year Treasury yield was over 10%, I predicted “hat-sized bond yields.” Of course, they’ve fallen much lower in recent years.

Actually, there was an inflation problem early last year when rising food and fuel prices in the CPI reduced the purchasing power of consumers, which depressed consumer spending. However, core CPI inflation remained subdued, mostly because high unemployment kept a tight lid on wage inflation.

Energy prices are rising again this year in the CPI. They are up 21.8% during January and February at an annual rate. Food prices in the CPI are much more subdued, rising only 1.2%. Wage inflation was only 1.9% y/y during February based on average hourly earnings.

So where’s the inflation problem? As noted yesterday, it’s mostly in Asia on an anecdotal basis. More stories are popping up about rising labor costs in the region. This upward pressure is already showing up in US import prices on products coming from China. An index that tracks these prices is compiled by the Bureau of Labor Statistics. It fell 1.8% in 2009, and rose 0.8% in 2010 and 3.6% in 2011. Through February of this year, it edged down slightly to 3.3% y/y.

Meanwhile, despite the massive amounts of liquidity pumped into global financial markets by central banks, inflation remains mostly subdued around the world, though there is clearly an upward bias. Of course, the main reason they flooded the markets with liquidity was to avert deflation. They seem to be succeeding. The question is: Can they avert reflation?

Core CPI inflation among the 30 “advanced” economies in the OECD has risen from 1.1% y/y in the fall of 2010 to 2.0% during January of this year. That’s not a serious problem since it remains subdued and has been fluctuating in a flat range between a low of 1.1% and a high of 2.4% since 2004. (More for subscribers.)

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