Ignore central bank hysteria: inflation risks are fading fast
Simon Ward
3 Comments
Global six-month consumer price inflation peaked in June and fell further in August, reflecting pass-through of lower oil prices and a small decline in core momentum. Current commodity prices suggest a sizeable further drop into Q4 – see chart 1*.
Chart 1
Annual as well as six-month CPI inflation probably peaked in June, with the peak occurring within the expected time band following a major top in annual broad money growth in February 2021 – money trends lead inflation by two to three years, according to the monetarist rule of thumb.
G7 annual broad money growth is estimated to have fallen further to below 4% in August, widening an undershoot of its 4.5% average in the five years before the pandemic – chart 2. The suggestion is that G7 inflation rates will be back at or below target around end-2024, if not before.
Chart 2
Markets were spooked by last week’s news of a hefty monthly rise in US core CPI in August but six-month momentum was little changed and below a June peak, while PPI pressures continue to ease – chart 3.
Chart 3
Central bankers are supposedly focused on preventing high inflation from becoming embedded in expectations. The view here has been that expectations were unlikely to become “unanchored” against a backdrop of weak money growth. The latest consumer surveys by the New York Fed and University of Michigan show longer-term inflation expectations back within 2010s ranges – chart 4.
Chart 4
UK annual core CPI inflation made a marginal new high in August but money trends mirror the global picture and are signalling a 2023-24 collapse – chart 5. The latest Bank of England / Ipsos inflation attitudes survey, meanwhile, reported a fall in consumer longer-term inflation expectations, which have remained within the 2010s range – chart 6.
Chart 5
Chart 6
The apparent anchoring of longer-term US / UK expectations suggests that wage pressures will dissipate rapidly as current inflation rates fall sharply in 2023.
*The GSCI commodity price index uses US prices for the natural gas component; the series shown by the gold line in the chart incorporates an adjustment for European prices.
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Reader Comments (3)
Simon, love your work, thank you! Can I assume that your focus on "narrow money" is a broadly similar concept to other people's focus on changes in Fed assets, RRP, TGA, and subsequent impact on reserves? Thanks!
The argument is surely that high inflation cannot persist in the face of negative real money growth? Regardless of expectations.
It will be "mechanical". Raising prices will simply cause demand to fall by a similar amount.
Rob, No it isn't. By "narrow money", I mean (a variant of) M1, which is currency in circulation and demand / overnight deposits. The latter are liabilities of the commercial banking system not the central bank. Changes in the Fed's balance sheet can be reflected in these deposits but an effect is not guaranteed and they can fluctuate for other reasons (e.g. households / firms choosing to increase holdings of "transactions" money ahead of spending).