Asia | China | COVID | Emerging Markets | Europe | Monetary Policy & Inflation | US
Inflation! What Inflation?
- By Bilal Hafeez
- 1 min read
Imagine the following. A country doubles its fiscal deficit, increases its public spending (especially on public investment), accelerates payments to the unemployed, and re-opens its economy after a pandemic. You’d think inflation would soar. China has all those policy traits, but the latest inflation print for December shows headline inflation at an anemic 0.2%, while core inflation is at 0.5%.
And look at recent years. Headline inflation has been as high as 5% (driven by a swine flu-related spike in pork prices), while core inflation has struggled to reach even 2% (Chart 1). Many are looking for the recent surge in commodity prices (such as oil and soybeans) to lead to higher headline inflation and then higher core inflation in regions like the US or euro area. But the China case shows that the transmission from commodity inflation to core CPI inflation is weak.
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Summary
- China has increased fiscal deficits, credit, public spending, and has re-opened, yet inflation is anemic.
- This shows that commodity price inflation may not translate to core inflation.
- The euro area is showing weak inflation again, while Japan is back in deflation. This suggests a non-inflationary world, including the US.
Market Implications
- Concerns over inflation are overdone, which should support equities and means central banks refrain from tightening.
- There may be more potential for weak currency policies to raise inflation.
Imagine the following. A country doubles its fiscal deficit, increases its public spending (especially on public investment), accelerates payments to the unemployed, and re-opens its economy after a pandemic. You’d think inflation would soar. China has all those policy traits, but the latest inflation print for December shows headline inflation at an anemic 0.2%, while core inflation is at 0.5%.
And look at recent years. Headline inflation has been as high as 5% (driven by a swine flu-related spike in pork prices), while core inflation has struggled to reach even 2% (Chart 1). Many are looking for the recent surge in commodity prices (such as oil and soybeans) to lead to higher headline inflation and then higher core inflation in regions like the US or euro area. But the China case shows that the transmission from commodity inflation to core CPI inflation is weak.
It’s not just China that has struggled to raise core inflation. The latest core inflation data for the euro area printed at 0.2% for December, while Japan’s core inflation has moved into deflation (Chart 2). Wednesday’s US CPI data is also likely to show sub-2% core inflation. We’ve argued elsewhere that COVID will likely dampen inflation for years to come as tech disruptions in the service sector and large output gaps will keep a lid on inflation. A truly inflationary world would see price pressures in the euro area, Japan, China as well as the US. Yet the evidence is pointing the other way: to a low inflation world.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)