When is global inflation no longer low?
Tom Traill - 8 February 2017
Over the past few months the inflationary landscape in advanced countries has been re-drawn. Scepticism surrounding OPEC’s planned output cuts has abated. The extremely weak oil prices of a year ago are a fading memory. Food price inflation is creeping up. Unit labour cost inflation is nudging up core inflation for labour-intensive service industries. In some countries, rental inflation has also surged. Hence the question: when is global inflation no longer low?
The figure below shows Z-scores for a wide range of countries. The Z-score is the number of standard deviations inflation is currently sitting away from the pre-crisis average (most recent data is for December data except Poland, Egypt and South Africa). The benchmark used here is the relatively settled period 2000 to 2007 and the standard deviation is derived from these year also.
Clearly, it remains the case that many more countries are below their pre-crisis average than above it. Our measure of GDP-weighted global inflation was 2.4% in December, a little shy of the pre-crisis average of 3.1%. However, for 28 out of the 53 countries under scrutiny, the current inflation reading falls within one standard deviation of the mean. As recently as January 2015, when global inflation hit rock bottom, only 16 countries fell within these limits. Typically, if inflation outcomes across countries are normally distributed, we would expect 36 out of 53 to lie in within this range.
Japan, for so long the darling of the disinflationiaries, is more than one standard deviation above its pre-crisis inflation average. It is easy to dismiss the efforts of the Abe administration to reflate the Japanese economy, but on a variety of nominal measures – including credit and broad money growth – progress is being made.
Since US, China, Germany and UK, all now fall within one standard deviation of their pre-crisis means, it is no longer reasonable to classify them as deviant. The UK averaged 1.6% inflation in the 2000-07 and 1.6% in December and will soon surge well beyond the central 2% objective. Indeed, at last week’s Inflation Report press conference the Bank of England confirmed its expectation of inflation remaining above 2% for the next 3 years.
At the bottom of the table, in the hospital wing, are several European economies, which still weigh down the global and advanced aggregates. Greece and Italy are particularly striking, both more than 5 standard deviations below the mean. Greece’s annual inflation rate of just 0.3% compares to a pre-crisis level of 3.3%. Italy is at 0.6% relative to a benchmark of 2.4%. The remarkable exception is Spain, where inflation averaged 0% inflation for the 46 months up until November 2016, but recorded 1.4% in December and 3% in the flash measure for January.
Perceptions of low and falling inflation have become deeply entrenched in recent years, but in many cases, they are no longer valid descriptions. Inflation is heading back to its pre-crisis levels and probably well above them in many instances. Time to throw off the ‘low inflation’ mantle.
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