Inflation Watch A mid-month focus on inflation via Traditional Indexes, Commodity Prices, and Labor Costs

Inflation exceeded expectations in April. The more durable inflation measures such as wage inflation are also improving. We characterize the recent improvement in inflation as a relief from the threat of deflation but still quite far from being a catalyst for run-away inflation.

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Inflation missed expectations in March.  The three key inflation drivers this year - oil, the Dollar and the Chinese yuan, are all going in the right direction.  The risk of being too early on the inflation call far outweighs the risk of being too late.  Patience is still recommended.

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Inflation met or modestly exceeded expectations. The three key drivers for inflation (oil, the Dollar and the Chinese yuan) continued to improve. But we are not rushing to declare victory on disinflation. “Organic” inflation, such as sustained wage inflation, has been very elusive so far.

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Both CPI and PPI surprised to the upside.The three key drivers for inflation (oil, the Dollar and the Chinese yuan) all saw some improvements.  Despite the recent improvements, we are still in no hurry to call the bottom in inflation.  The downturn in the energy and manufacturing industries has wide-reaching effects. Patience and caution are still warranted.

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Inflation was lower than expected in December.  The three key drivers for inflation this year are oil, the Dollar and the Chinese yuan. None of these are helping so far.  We have been avoiding inflation sensitive assets and do not see any reasons to catch the falling knife at this point.

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Inflation was largely in line with expectations in November.  The impact of lower energy prices seems to have lessened as the year-over-year comparison gets better.  We are far from ready to call a return of inflation. The ISM price indexes supported our still cautious view towards inflation.

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Inflation met expectations in October.  Overall inflation not under-shooting expectations is likely to give the Fed some comfort when it decides on the rate hike in December. Various wage inflation measures show some promise but we will be patient and wait for confirmation.

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Inflation met or slightly beat expectations in September.  We are watching the oil prices and the dollar closely for signs that the disinflationary headwind might be dying down.

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Longer term drivers of inflation, such as velocity of money, capacity utilization, wage inflation, all suggest disinflation is here to stay.  It’s still too early to call the bottom in oil prices so we continue to expect weaker producers’ inflation ahead.

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The current inflation numbers are not yet reflective of the recent sell off in oil prices so we expect even weaker inflation going forward.

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With the recent weakness in oil prices and the renewed strength of the U.S. dollar, we would not be surprised to see weaker headline numbers in the next few months. The expectations of a rate hike might actually end up pushing the rate hike further out. We are now less sanguine about a pick-up in PPI in the rest of the year.

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The overall global inflation picture took a small step back as both developed and emerging countries reported below-consensus inflation numbers. More patience is needed as the picture on the wage inflation front is also mixed. We continue to look for an upturn in the PPI in the rest of the year.

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The stabilization in energy prices and overall CPI is encouraging. The disappointing inflation picture has prompted swift and dramatic central bank actions around the world this year. We expect limited downside to inflation at producers’ level and we believe an upturn in the PPI is not too far away. Patience is needed.

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Inflation - Patience Needed

We are still seeing more disinflationary than inflationary pressure so patience is needed. The disappointing inflation picture is consistent around the world, with both developed and emerging countries undershooting inflation targets. Inflation at producers’ level has more downside too in the near future.

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We expect the downward pressure on inflation to persist in the next few months. But we think the recent sell-off in all inflation-related assets is a bit over done, however, we will exercise patience to wait for clearer signals. The NFIB actual and future compensation survey continue to offer glimmers of hope. Inflation at producers’ level has more downside too in the near future.

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•  We expect the downward pressure on inflation to persist in the near term.
•  But we are starting to think the current pessimism about inflation is a bit overdone.
•  Wage related indicators, which is by far the most important driver of inflation, have started to point to a rise in wage pressure as the job market gets tighter.
•  Inflation at producers’ level has more downside too in the near future.

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Inflation remains weak but is slightly ahead of market expectations. Inflation numbers have not been able to meet the downwardly revised expectations in both developed and emerging markets. The Fed has plenty of room to wait and see and it is in no rush to raise rates until the signs are clear.

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Inflation remains muted and is certainly softer than what the Fed would like to see. The recent string of softer global economic data, especially outside of the U.S., has torpedoed the market’s expectations for inflation. The recent string of softer global economic data, especially outside of the U.S., has torpedoed the market’s expectations for inflation.

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August inflation unexpectedly fell into the negative territory. The softness in global inflation makes it harder for a single country to decouple on the upside. If the strength in the dollar has staying power, this will show up in lower import prices going forward, another headwind for inflation. The Fed’s hawkish stance certainly does not help inflation expectations either.

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July inflation was slightly lower than expectations. So far we have not seen sustained wage inflation pressure. The pause in inflation is global in scope, which makes it even harder for a single country to decouple on the upside. Inflation at producers’ level is still moderate.

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