Core inflation rates in the developed world have been fairly stable in recent months at around the 1.3% per annum level (see Chart 1). This is certainly an improvement compared with a year or so ago when the average was slightly below 1%, but is still short of where central banks would it to be. That said, core inflation in the US is around 2% which is where the Federal Reserve would like it to be (and hence why it has started to increase interest rates).
In recent months, core inflation has started to trend downwards slightly in Europe and Japan - something the ECB and BOJ will be watching closely no doubt – but is still well above zero. Despite headline inflation numbers which are much lower as a result of food and energy price declines, central banks should be commended for maintaining price stability in recent years (with the exception of Japan whose success is more recent).
In the emerging world, the inflation picture continues to improve, with rates continuing to fall in Brazil and Russia, and stabilising around 2% in China (see Chart 2). India’s inflation remains a little higher than policymakers would like it to be, but it remains much lower than levels seen back in 2012 and 2013.
I have included this month a chart of year over year wage growth in developed economies (see Chart 3). As with core inflation rates, it is encouraging to see that wage growth in the US, the UK and Europe has remained in the 1.5-2.5% range, while in Japan it has risen from around -1% in 2013 to close to 1% currently. The assertion that Japan prime minister Abe is losing the battle against deflation is perhaps unwarranted.
Published in Investment Letter, June 2016
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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