Average global year-on-year inflation, calculated by Bloomberg, reached a cyclical high in November of last year at 10.4 percent. Since then, this widely watched global inflation indicator has gradually declined and is currently at 6.5 percent. However, it is important to note that the decrease in overall inflation was primarily caused by a significant drop in energy prices, such as the price of Brent crude oil, which has fallen by a massive 25 percent since November of last year.
Fundamental demand-driven inflation pressures in an economy are better monitored through core inflation, which removes volatile energy and food prices from the overall inflation calculation.
The following graph illustrates the development of core inflation in key economies and the Czech Republic. (Source: Bloomberg, Conseq modification)
It is evident that China is the only economy currently not facing inflationary pressures, with Chinese core inflation reaching just 0.6 percent in May. Otherwise, core inflation in all monitored economies is more or less above the central banks’ two percent inflation targets and is already a problem in Japan, where it reached 2.6 percent in May.
Notice the clear upward trend since the beginning of last year. Core inflation in the United States and the eurozone stood at 5.3 percent. Looking at the inflation curves of these two economies, it is clear that the process of disinflation, or decreasing inflation rates, has not even really begun.
Among the countries monitored, the Czech Republic is clearly the worst off, with core inflation reaching 10.3 percent in May, with a peak of 14 percent in October of last year.
What’s next?
If energy prices were to rise again in the coming period, which cannot be ruled out, overall inflation would have a strong tendency to accelerate across the global economy.
Central bankers are therefore somewhat cornered at the moment. It is likely that they will have to further increase interest rates, which will negatively impact economic growth dynamics and could also bring further problems in terms of financial stability. Therefore, let’s prepare for the fact that inflation will not return to the two percent inflation targets and will instead settle significantly higher, around five percent, in the medium term.
Four pro-inflationary factors
From a global perspective, there are also several current long-term secular pro-inflationary factors that significantly exceed central banks’ inflation targets.
The first is deglobalization, or the tendency to shorten supply chains. In other words, industrial production now has a tendency to move at least to some extent from cheap Asian economies back to Europe and North America, which have significantly higher production costs.
The second factor is demographic trends, where the population has a strong tendency to age, and there is also a significant decline in the absolute number of working-age population. This factor creates strong pressures on nominal wage growth in the labor market, which strongly supports increased inflation.
The third secular pro-inflationary factor is the peak of cheap energy, a term coined by the phenomenal American macroeconomic analyst Luke Gromen.
Michal Stupavský
He studied finance and business valuation at the University of Economics in Prague and holds the CFA designation. He is a co-author of the first Czech book on behavioral finance, Investor of the 21st Century. From 2009 to 2012, he worked at Conseq Investment Management as a portfolio manager of an equity fund focused on Central and Eastern European markets. He then worked at Unipetrol as a manager.Global Inflation Rates Decrease, but Core Inflation Remains a Concern
The average global year-on-year inflation rate, calculated by Bloomberg, reached a cyclical high in November of last year at 10.4 percent. Since then, this widely watched global inflation indicator has gradually declined and currently stands at 6.5 percent. However, it is important to note that the decrease in overall inflation was primarily caused by a significant drop in energy prices, such as the price of Brent crude oil, which has fallen by a massive 25 percent since November of last year.
Fundamental demand-driven inflation pressures in an economy are better monitored through core inflation, which excludes volatile energy and food prices.
The following graph illustrates the development of core inflation in key economies and the Czech Republic. (Source: Bloomberg, Conseq modification)
It is evident that China is the only economy currently experiencing no issues with inflation, as Chinese core inflation reached a mere 0.6 percent in May. In all other economies, core inflation is more or less above the central banks’ two percent inflation targets and is becoming a problem even in Japan, where it reached 2.6 percent in May.
Notice the clear upward trend since the beginning of last year. In both the US and the eurozone, core inflation stood at 5.3 percent. Looking at the inflation curves of these two economies, it is clear that the process of disinflation, or decreasing inflation rates, has not yet begun.
Among the countries analyzed, the Czech Republic is clearly in the worst position, with core inflation reaching 10.3 percent in May, compared to a peak of 14 percent in October of last year.
What’s Next?
If energy prices were to rise again in the coming period, which cannot be ruled out, overall inflation would likely have a strong tendency to accelerate across the global economy.
Central bankers are therefore somewhat cornered at the moment. It is likely that they will have to further increase interest rates, which will negatively impact economic growth dynamics and could pose additional problems in terms of financial stability. Therefore, let’s prepare for the fact that inflation will not easily return to the two percent inflation targets and will likely settle significantly higher, around five percent, in the medium term.
Four Pro-Inflation Factors
From a global perspective, there are also several current long-term secular pro-inflation factors that strongly support inflation rates well above the central banks’ inflation targets.
The first factor is deglobalization, or the tendency to shorten supply chains. In other words, industrial production now has a tendency to move from cheap Asian economies back to Europe and North America, which have significantly higher production costs.
The second factor is demographic trends, where the population has a strong tendency to age, while there is also a significant decline in the absolute number of working-age population. This factor creates strong pressures on nominal wage growth in the labor market, which strongly supports increased inflation.
The third secular pro-inflation factor is the peak of cheap energy. This term refers to the point at which cheap energy becomes scarce, which is currently happening. This factor also contributes to increased inflation.
How do long-term secular factors such as deglobalization and demographic trends contribute to higher inflation rates
The most affected, with core inflation reaching 10.3 percent in May, peaking at 14 percent in October of last year.
What does the future hold? If energy prices rise again in the coming period, which is a possibility, overall inflation would have a strong tendency to accelerate globally. Central bankers are in a difficult position as they may have to further increase interest rates, which can negatively impact economic growth and financial stability. Inflation is expected to remain significantly higher, around five percent in the medium term, rather than returning to the central banks’ two percent inflation targets.
There are also several long-term secular factors that contribute to higher inflation. Deglobalization, or the shortening of supply chains, leads to increased production costs in regions like Europe and North America. Demographic trends, such as an aging population and a decline in the working-age population, create pressure on wage growth and support increased inflation. The peak of cheap energy, as coined by macroeconomic analyst Luke Gromen, is another factor contributing to higher inflation.
Overall, while global inflation rates have decreased, core inflation remains a concern. It is important for central banks and policymakers to closely monitor this indicator and consider the various factors that contribute to inflationary pressures in order to ensure economic stability and sustainable growth.
