PriceStats®: Global Inflation on the Run
A look at quarterly measures of inflation, based on prices of millions of items sold by online retailers, to help investors anticipate and evaluate the impact of inflation.
US Inflation Risks Recede Further
The beginning of the Federal Reserve’s (Fed) easing cycle has removed one uncertainty for rate markets, but the pace and end point of the cycle remain up for debate. This will be settled by the evolving balance of risks around incoming labour market and inflation data. On the latter, PriceStats provides a good deal of reassurance. PriceStats ended the third quarter benignly, with the US price level falling modestly in September. This was sufficient to bring the annual inflation rate according to PriceStats below 1.5%, its lowest reading in almost three years.
This is in keeping with the softer trend in official data, especially measures excluding shelter (Figure 1). Although shelter, which is not captured directly by PriceStats, remains a challenge, Fed Chair Powell recently reinforced the idea that as long as new rental inflation remained benign, the Fed could be relaxed about the stickiness of shelter prices. In short, if you dismiss shelter CPI as simply lagging, there’s no need to worry about the US inflation trend for now. This will open the way for the pace of policy normalisation to be dictated by the rate of deterioration (or otherwise) in the labour market.
Emerging Market Inflation in Retreat
Part of the narrative of potentially improved fundamentals for emerging market (EM) sovereign debt is lower inflation. Both the interest rate and inflation cycles across emerging markets have in some cases been a number of months ahead of developed markets. To that end, it’s important to track whether the good news on inflation will continue across emerging markets.
The good news from PriceStats is that annual food price inflation, which is a large part of many EM baskets, has fallen back to its lowest level this year (Figure 2). This could be an especially important factor in Mexico and South Africa. PriceStats captures their annual inflation rates are running below the official statistics, suggesting room for further policy easing.
Improving Inflation News for Europe
In contrast with the Fed, the European Central Bank’s easing cycle had been well telegraphed since almost the start of this year, to begin in June and progress at a pace of 25 bps a quarter thereafter. But the lurch lower in leading indicators and recent acceleration in the pace of disinflation are prompting markets to consider something quicker (Figure 3).
The softer trend in inflation is borne out by our PriceStats data, which shows the eurozone’s annual inflation rate fell by more than 1.4 percentage points in the third quarter alone. While part of this was due to favourable base and energy effects, there is still a clear softening in the underlying inflation trend, which suggests weaker economic activity is finally impacting companies’ pricing power. Interestingly, this rapid change in the inflation trend and potential for further easing have yet to dramatically alter investor behaviour toward European sovereign debt, especially Bunds, where long-term investor demand remains unusually weak. This will be something to watch for in Q4.