JANUARY 2017

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- Suresh Jaura
Publisher and Managing Editor

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ECONOMY: Inflation's Magical Disappearing Act

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By Peter G. Hall, Vice-President and Chief Economist EDC

You think reality TV defines fickle? It doesn't shake a stick at the ‘price pundits’. They have dropped inflation-hype faster than the proverbial hot potato. You could hardly tell these days that just six months ago, it was an obsession, even moreso in emerging markets. Why the neo-silence?

Price pressures began to build as the world economy gained momentum late in 2010 and in the early months of 2011. Commodity price increases added to worries that the vast lakes of liquidity injected into the market through quantitative easing would lead to runaway inflation. In many cases, central banks felt the need to tighten, in an attempt to nip this trend in the bud.

The world economy took care of this without their actions. Oil price spikes in the wake of the Arab Spring hit global consumers at a very inopportune moment, snuffing out rising momentum and eventually bringing energy prices back down. What oil prices began, an ugly sequence of natural disasters completed. From Oceania to Japan, then to China, North America, Thailand and others, catastrophe seemed relentless, and in addition to the horrifying human toll, it hobbled global growth significantly. Mid-year performance weakened enough that pundits were - once again - musing about the dreaded double-dip.

As usual, inflation took awhile to catch on. Indeed, as the economy slowed, initially there was talk of stagflation. That, too, disappeared. How have the numbers moved? The US was weathering CPI gains of 3.8% in the middle of last year - now, year-to-year gains are more like 2.9%, with the last four months averaging just 0.85%, annualized. Similarly, prices in the Euro-Area economies eased to 2.7%, but core gains have averaged 1.5% in the past four months. Net of indirect taxes, energy and food, Canadian prices follow the same trend.

Emerging markets are seeing more dramatic slowing. Consumer prices are currently growing by 7.6% year-to-year in India, but they have fallen fast from 10% in mid-2011. Over the same timeframe, China's prices are down from 6.7% to just 3.6% and falling. After strong monetary tightening, Brazil is seeing a rapid slowing in inflation, and price gains have slowed considerably in Russia and Mexico.

Even with the weight of this evidence, there is still an undercurrent of worry about inflation in the West. With all the liquidity out there, if what's going on in the US is the real thing and we are staring a recovery head-on, fast redeployment of all that cash could, according to some, ignite inflation pressures. There are at least two key problems with that - first, central banks can and will tighten at the hint of impending pressure. Second, there is lots of spare capacity in the economy to be soaked up before we hit any big walls.

This suggests that there is some breathing room before tightening is necessary, and key central banks seem to agree. We have waited long enough for a true recovery, and we face enough risks globally, that there are other critical issues that rank much higher on the do-list.

The bottom line? The world will be well on the way to recovery before inflation becomes a significant threat. We can all hope that nothing interferes with current economic momentum.

The views expressed here are those of the author, and not necessarily of Export Development Canada. ©EDC

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