From Gavyn Davies' blog at the FT:
A few months ago, this blog commented that a rise in inflation in the advanced economies early in 2016 was “almost certain”. Thank goodness for the word “almost”. Since then, oil prices have plumbed new depths, and the markets have remained obsessed with fears about deflation.
The case for higher inflation in 2016 rested on the fact that the impact of energy on headline consumer price inflation would change direction when oil prices stabilised. This “inevitable” arithmetic effect has been delayed by the slump in oil prices in January, but it should manifest itself in the near future.
The key question, though, is whether this automatic rise in headline inflation presages a more important turning point for underlying inflation in the advanced economies – a turning point that has been wrongly predicted for several years now.
The answer is that there are some tentative signs of a slow rise in underlying inflation in the US, where price increases have been higher than expected in recent months. In contrast, inflation rates in the Eurozone and Japan have surprised on the low side. There, fears of “secular stagnation”, leading to deflation, still seem all too real.
Many economists argue that concerns about inflation in the US, reflected in the Federal Reserve’s decision to embark on monetary tightening in December, are still way over-blown. With views about the future path for inflation sharply polarised even within the Federal Open Market Committee, some policy makers have said that their decisions will be determined by actual consumer price data in the months ahead.
So far, the data seem to be justifying some of the concerns of the hawks. In January, the core PCE consumer price inflation rose to 1.7 per cent, not far below the official 2 per cent target for overall PCE. Since July of last year, both core CPI and core PCE inflation have accelerated by 0.4 percentage points, to 2.2% and 1.7%, respectively.That represents only scant evidence of a turning point in the inflation process, but the underlying price data calculated by several of the regional banks in the Federal Reserve system show recent inflation rates running close to or above 2 per cent. The graph at right shows that several of these indicators dipped in late 2014, but since then they have rebounded towards the 2 per cent target. There has been little change in these indicators since the December FOMC meeting, so they are unlikely to prove decisive in either direction for the Fed....
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