{"id":50970,"date":"2016-04-14T00:05:36","date_gmt":"2016-04-13T22:05:36","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/inflation-in-developed-economies-is-on-the-rise\/"},"modified":"2019-12-31T00:38:25","modified_gmt":"2019-12-30T23:38:25","slug":"inflation-in-developed-economies-is-on-the-rise","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/inflation-in-developed-economies-is-on-the-rise\/","title":{"rendered":"Inflation in developed economies is on the rise"},"content":{"rendered":"

Consumer price inflation in the Group of Seven (G7) major economies rose from zero in September 2015 to 0.6% in February. More worryingly, \u201ccore<\/em>\u201d inflation \u2013 excluding food and energy prices \u2013 reached 1.6% in February, a four-year high.<\/p>\n

G7 consumer prices<\/h2>\n

\"henderson_global1.jpg\"<\/a><\/p>\n

Source: Datastream, G7 Total and G7 Core prices, December 2009 to February 2016<\/em><\/p>\n

Food and energy won\u2019t suppress the headline inflation rate for much longer. If commodity prices remain at current levels, headline inflation is likely to move slightly above the core rate by end-2016. Assuming stable core inflation, this would imply a rise of about 1.75 percentage points in the headline rate from its recent low. <\/p>\n

Upswing could continue<\/strong><\/p>\n

The core upswing may extend. Fluctuations in core inflation in recent years can be largely explained by two influences \u2013 labour market tightness and lagged pass-through of commodity price changes. The core rate tends to rise or fall depending on whether the G7 unemployment rate is below or above 6%. This \u201cPhillips curve<\/em>\u201d relationship, however, has been regularly disrupted by large commodity price swings, which feed through to core inflation after about a year.<\/p>\n

The unemployment rate fell below 6% in early 2015 and core inflation started to rise on cue. Commodity prices, however, simultaneously weakened sharply, their year-on-year fall reaching a maximum in mid-2015. This weakness moderated the increase in core inflation during 2015 and will remain a drag for much of 2016, allowing for the usual lag.<\/p>\n

The tight labour market, though, should continue to exert upward pressure on core inflation, with the unemployment rate down further to 5.5% in January. The core rate, indeed, could rise sharply from late 2016 as commodity prices turn from being a headwind into a tailwind. <\/p>\n

The policy response<\/strong><\/p>\n

How will central banks respond? If economic growth remains weak, they will probably look for excuses to maintain loose policies. A possible approach would be to argue that inflation should be allowed to overshoot for a while to compensate for the 2015-16 undershoot.<\/p>\n

A rebound in growth later in 2016, however, is a plausible risk. Solid global money and credit trends suggest that an upside surprise is more likely than a recession. A dual acceleration of prices and economic activity would force reluctant central bankers to tighten.<\/p>\n

Rising inflation, it should be emphasised, is an issue for developed rather than emerging economies. Core pressures in the \u201cE7<\/em>\u201d large emerging economies are moderating in response to weak activity and currency stabilisation. Falling inflation is opening the door to central bank easing even as G7 prospects argue for less accommodative policy.<\/p>\n

E7 consumer prices<\/h2>\n

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\nSource: Datastream, E7 Total and E7 Core prices, December 2009 to February 2016