Test for Central Banks and Markets to be Presented by Reawakened Global Inflation

Inflation numbers are a key market focus for global central banks who have been battling to ward off deflation and have spent trillions of dollars in the years since the financial crisis. And with mounting signs, their efforts seem now to be paying off.

Rhetoric from central banking chiefs continues to be directed towards prioritizing other economic imperatives and tilted away from pursuing swift actions to address rising prices despite the strengthening trend in data seen in recent months. And a mostly steady march higher since last summer is being seen in longer-term bond yields in key global markets.

With spikes in energy costs leading the way, helped by food and tourism, inflation data out of China on Tuesday surprised to the upside. Yet preventing bubbles over targeting inflation and maintain its focus on containing leverage seem to be the aim of the People’s Bank of China.

Julian Evans-Pritchard, China economist at Capital Economics, expressed skepticism that the high data points will last in a note on Tuesday and explained that the timing of the New Year holiday played a role in boosting the latest data.

“The base effects that have boosted inflation in recent months are soon going to go into reverse. Meanwhile, tighter monetary policy, slowing income growth and cooling property prices should keep broader price pressure contained over the medium-term,” he posited.

And similarly in the U.S., the first few months of 2017 see a high bar given strong data recorded in the same period last year despite core inflation surprising to the upside in December in hitting 2.2 percent.

Before dropping to a stable level of around 2.0 percent from the spring and falling further due to higher energy comparables from 2016 later in the year, headline inflation is seen to be spiking to 2.6 percent in February and March by economists at SocGen.

“Still, the annual average CPI is likely to be about 2.0% in 2017 versus 1.3% in 2016,” notes Omar Sharif, Senior U.S. Economist at SocGen, in recent research.

Rick Lacaille, global chief investment officer (CIO) at State Street said that the economy and markets can handle this level.

“On the US I think we’ll see a little bit more core inflation but frankly we don’t think that’s going to be a real problem,” he predicted.

For the central bank’s rate rise agenda this year, data dependency is widely expected to be pointed at by Fed Chair Janet Yellen.

Driven by boosted fiscal spending and resulting in speedier interest rate ramp-ups accompanied by a stronger dollar, the unknown variable is the extent to which President Trump proceeds with his reflationary proposals.

With increasing calls out of Germany for higher rates and a stronger currency contrasting with the needs of the weaker member states, the euro zone presents a more complicated picture for European Central Bank (ECB) chief, Mario Draghi.

“If you look at the euro zone landscape overall I’m not sure you see quite so many inflationary signs and I think that puts the ECB in a little bit of a dilemma with push and pull coming from different parts of the union,” said Lacaille.

Draghi recently said the ECB would need to see underlying inflation show more of a sustained uptick before tightening policy despite consumer price inflation jumping over expectations to hit 1.8 percent in January.

(Adapted from CNBC)

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Categories: Economy & Finance, Uncategorized

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