Tuesday, May 20, 2014

Tracking Global Inflation (excerpt)

The IMF’s measure of the world CPI inflation rate recently peaked at 4.9% during September 2011 and fell to 2.8% during March. Inflation is subdued for advanced economies (1.3%) and relatively low for emerging ones (5.0%).

We believe that the ultra-easy monetary policies of the major central banks might actually be keeping a lid on inflation. That’s not what we all learned in school, of course. We were taught that easy money stimulates demand, which boosts inflation, especially when economies are growing at full capacity. However, easy money can also boost capacity. That certainly might explain why the commodity “super cycle” lasted only 10 years (from 2001-2010) rather than 25-50 years, as was widely hyped. China’s borrowing binge financed lots of excess capacity, as evidenced by its PPI, which has been falling for the past 26 months.

The core CPI inflation rate for the 34 advanced economies in the OECD remains subdued below 2.0% y/y. However, it did rise during March to 1.7%, the highest since October 2012. The comparable inflation rate for the G7 was only 1.4% for the fifth consecutive month through March.

Credit conditions are especially easy in the advanced economies. Rather than stimulating demand and consumer price inflation, easy money has boosted asset prices. It has also facilitated financial engineering, especially stock buybacks. Private equity investors are funding capacity expansion by seeding entrepreneurs who are developing productivity-enhancing innovations.

Today's Morning Briefing: Tracking Global Inflation. (1) The Comeback Kid? (2) World inflation remains subdued according to IMF. (3) Theory vs. practice. (4) Easy money can boost capacity too. (5) The not-so-super cycle in commodities. (6) Easy money can also boost asset prices rather than CPIs. (7) Is Eurozone’s lowflation due to strong euro or structural reforms? (8) Does the world really need more capacity in Japan? (9) New and old PPI in the US telling same story. (10) Rent inflation inflating US CPI. (More for subscribers.)

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