(The author is editor-at-large for finance and markets at Reuters News. All views expressed here are his own)
LONDON, Jan 6 (Reuters) – It’s hard to play with the reflex trading around the world when consumer prices haven’t stopped falling.
This weekend the eurozone is set to post the longest shared period of major monthly deflation since the single currency was introduced – joining Japan and Switzerland in a pandemic-driven price reduction battle that will press the European Central Bank to its feet. basic monetary policy even as the market is betting on recovery.
If the consensus forecast proves to be correct, the eurozone deflation rate should have slowed slightly to 0.2% last month – even as aggregate prices remained negative for the fifth month in a row and matched a 5 month decline in 2009. Core inflation rates, excluding prices food and energy, is likely to stay in positive territory, although the expected 0.4% rate remains the lowest on record.
Japan and Switzerland have headline and core inflation rates that run even more negatively than the eurozone.
And the new year hardly bodes well for rising prices, with COVID-19 raging, even more severe economic lockdowns and a potentially vaccine-resistant variant emerging.
Oil prices have more than doubled the depth of the pandemic shock 9 months ago – even if crude remains down more than 20% this time last year. And the rebound in world food prices puts them about 3% above 12 months ago and near 6 year highs.
But it’s not the stuff of runaway inflation that has led us to invest in wheelbarrows to carry cash.
The ECB’s survey of professional forecasters in the last quarter of last year established a more than 70% probability that inflation will remain at or below the ECB’s near 2% target over the next 5 years – although it also considers only a 3% deflation chance. survived that timeline.
German 10-year inflation expectations, implied by inflation-protected government bonds – called breakevens – are less than 1%.
But many in financial markets remain convinced that rising global inflation will still be a legacy of this crisis – even if it is largely dependent on the United States for evidence and is the opposite of a very bearish view of the US dollar.
The break-even point of US 10-year inflation rose above 2% on Monday for the first time in two years as Fed money printing outpaced other central banks and the prospect of massive fiscal waste is revived by increasing chances Democrats can take over both houses of Congress after this round. the second Georgian Senate this week.
Asset manager giant BlackRock predicts the road ahead will see the central bank determined to limit nominal government lending rates as growth and inflation eventually recover. Real rates, or inflation-adjusted, will therefore sink even further and give riskier assets a bigger boost than during previous periods of inflation.
“Medium-term inflation risks look underappreciated,” he told clients.
Morgan Stanley global economist Chetan Ahya said the bank’s optimism about the rebound meant inflation would move significantly higher as well and he still believed the Fed would hit its 2% target by the end of the year and let it cross its limit through 2022.
Citi’s Ebrahim Rahbari is also confident that the market bias for reflections from the end of last year will persist despite regular concerns surrounding the virus and associated restrictions.
“We expect reflective cross-asset trading to continue working this year, as positions remain modest, while real rates remain low, money on the sidelines is sufficient and macro stimulus is strong,” he wrote.
For many, this “inflation fear” is simply a function of market position and hinges on the assumption the central bank will tolerate more inflation than in the past. But it still assumes it will reappear and remains wishful thinking.
The recent spike in everything from equities, breakevens, gold and even bitcoin has been the inevitable expansion of central bank money last year driving up long-dormant consumer prices. But it’s hard to see that happening while cash demand remains very high amid another wave of lockdown.
There is even little certainty that rising inflation will be sustainable without the unlikely of wage increases and major disruption to years of stable household inflation expectations.
However, the predominantly US-centered inflation outlook was offset by a very negative US dollar consensus.
As the deflationary years in Japan and Switzerland show, price deflation and currency appreciation tend to go hand in hand – as hoarding of money is driven by the prospect of increasing in real value over time.
Just how negative interest rates need to be offset is a policy conundrum – but perceived limits for negative interest rates due to banking stability concerns mean persistent deflation will only lift currencies such as the euro, yen and franc and potentially choke off the two largest economies. regions of the world.
Could US inflation be exported via a weaker dollar that lifted dollar-denominated global food and commodity prices? In the absence of higher wages, more expensive food and energy will only burden already-deprived households and burn again after this year’s shock.
Whatever the answer, the inflation fear requires a fair amount of confidence and is unlikely to emerge this year.
by Mike Dolan, Twitter: @reutersMikeD; editing by Barbara Lewis