Is global inflation nearing a peak?

1 month ago 31

Calling the top of the current wave of inflation has been a painful exercise for economists and central bankers, who have been proven wrong time and again during the past year.

But data on Wednesday, which showed that some measures of inflation had cooled in the world’s two largest economies, was likely to rekindle a debate about whether the worst might be over after a year of torrid price growth.

United States consumer prices did not rise in July compared with June due to a sharp drop in the cost of petrol, delivering much-needed relief to American consumers on edge after steady prices climbs during the past two years.

And China’s factory-gate inflation slowed to a 17-month low on an annual basis while consumer prices rose less than expected.

After wrongly predicting last year that high inflation would be transitory, most central bankers, including the US Federal Reserve, have stopped trying to put an exact date on when they expect current price growth to peak.

US central bank officials see inflation decelerating through the second half of the year, the European Central Bank puts the peak in the third quarter and the Bank of England sees it in October.

Here are some of the key data shaping the inflation debate:

Raw materials are getting cheaper…

The main culprit for the surge in consumer prices last winter – energy and other raw materials – may be the harbinger of lower inflation this time around.

Prices of critical commodities such as oil, wheat and copper have fallen in recent months after spiking earlier this year. Oil and food items soared after Russia invaded Ukraine.

Shoppers inside a grocery store in San Francisco, California, U.SShoppers inside a grocery store in San Francisco, California, United States [File: Bloomberg]

The fall in prices came amid weaker global demand and economic slowdowns in China, the US and Europe, where consumers are dealing with high prices.

Some indices of inflation are already being affected: fewer firms are reporting increased input costs, and wholesale price rise is decreasing in many parts of the world

…But European energy bills won’t

With winter approaching on the continent, European households are unlikely to see their energy bills come down anytime soon. Recently, there have been talks of rationing in eurozone countries, including in Germany.

This is because gas prices in Europe – which, for years, has relied on Russia for a large portion of its imports – are still four times higher now than a year ago and close to record highs. There has been much uncertainty surrounding gas flow via the Nord Stream pipeline.

Even in the United Kingdom, which has its own gas but very little storage capacity, consumers are set to see their power bills jump in October when the current price cap expires.

Increased petrol and diesel prices are seen on a display board at a filling station, in London, BritainIncreased petrol and diesel prices are seen on a display board at a filling station, in London, United Kingdom [File: Peter Nicholls/Reuters]

There is bad news for German drivers, too, who will see a subsidy at the petrol pump expire at the end of August.

Expectations are (mostly) under control

Some central bankers can take comfort in the fact that investors have not lost faith in them.

Market-based measures of inflation expectations in the US and the eurozone are only just above the central banks’ 2 percent target, while they remain uncomfortably high in the UK.

After the Federal Reserve’s meeting last month, the central bank’s Chair Jerome Powell stressed that the Fed is ready to use all of its tools “to bring demand into better balance with supply in order to bring inflation back down to our 2 percent goal”.

Consumers in the US, eurozone and UK, expect to see inflation stay above the 2 percent target for years to come.

According to a survey conducted by the Reuters news agency, a vast majority of the economists polled said that inflation would stay elevated for at least another year before receding significantly. About 39 percent of economists asked said that they expect inflation to stay high past 2023.

Core prices may be trending down…

Core inflation, the number that measures inflation while excluding the price of volatile components like food and fuel, has started to cool in the US and UK. Some economists predict Japan and the eurozone will follow suit.

Nevertheless, core inflation remains higher than most central banks’ comfort zone both in developed and developing economies. That means that central banks will continue to increase borrowing costs. The US Federal Reserve last month raised rates by 75 basis points for the second consecutive time. The bank meets again in September to consider further tightening.

A waiter walks holding a tray in a restaurant in Lisbon, PortugalA waiter walks holding a tray in a restaurant in Lisbon, Portugal [File: Pedro Nunes/Reuters]

Wednesday’s US data hows recent interest rate hikes may already be having some effects.

And an artificial intelligence model used by Oxford Economics suggests core inflation will also peak in Japan and the eurozone in the second half of the year.

The Long Short-Term Memory network, originally developed to help machines learn human languages, parses detailed inflation data to spot patterns that helps it predict the Consumer Price Index in the future.

…But wages are pointing up

Workers’ wages have increased in the last year due to a tight labour market but not as fast as inflation.

The US Employment Cost Index also recently revealed that higher wages also resulted in a significant increase in US labour expenses in the second quarter of 2022.

According to figures released earlier this week, the cost of labour per unit of production increased by about 10 percent for non-farm firms in the US in the second quarter of this year.

One of the main factors influencing pricing over the long term is wages, and if they climb too quickly, a spiral of price rises may start.

“If that happens, we end up with an almost self-fulfilling type prophecy, where firms will start to push price increases onto their customers,” Brent Meyer, policy adviser and economist at Atlanta’s Federal Reserve, recently told Al Jazeera.

Outside of the US, the economic recovery has been more muted, and the impending recession may make it harder for labour to negotiate lower wages.

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