Average global year-on-year inflation calculated by Bloomberg reached a cyclical high in November 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 last year.
Fundamental demand-driven inflation pressures in the 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 country currently not facing inflationary pressures, with Chinese core inflation reaching just 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 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 declining inflation rates, has not even begun.
Among the countries analyzed, 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 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.se setkáváme v souvislosti s postupným vyčerpáváním levných zdrojů energie, jako je ropa a zemní plyn. S rostoucí poptávkou po energii a omezenými zdroji se očekává, že ceny energie budou nadále stoupat, což bude mít vliv na celkovou inflaci.
Posledním faktorem je monetární politika centrálních bank. V reakci na pandemii COVID-19 centrální banky zavedly mimořádná opatření, jako je snížení úrokových sazeb a nákupy aktiv, aby podpořily ekonomiku. Tyto kroky však mohou také přispět k inflaci, zejména pokud se ekonomika začne zotavovat rychleji, než se očekávalo.
Vzhledem k těmto faktorům je pravděpodobné, že inflace zůstane výrazně vyšší než dvouprocentní cíle centrálních bank. To bude mít dopad na ekonomický růst a finanční stabilitu. Centrální banky budou pravděpodobně muset zvýšit úrokové sazby, aby omezily inflační tlaky, což může mít negativní dopad na ekonomiku.
Je důležité, aby vlády a centrální banky přijaly opatření k řízení inflace a minimalizaci jejích negativních dopadů. To může zahrnovat regulaci cen energie, podporu inovací a investic do obnovitelných zdrojů energie, podporu produktivity a zvyšování kvalifikace pracovní síly a monitorování a přizpůsobování monetární politiky.
Celosvětová inflace je výzvou, kterou je třeba řešit s cílem udržet ekonomickou stabilitu a udržitelný růst. Je důležité, aby vlády, centrální banky a další ekonomické subjekty spolupracovaly a přijaly opatření k řízení inflace a minimalizaci jejích negativních dopadů na ekonomiku a občany.
How does core inflation compare among key economies and the Czech Republic, and what implications does this have for central banks
Global year-on-year inflation, as calculated by Bloomberg, reached a peak in November last year at 10.4 percent. However, since then it has gradually declined and currently stands at 6.5 percent. This decrease in overall inflation is primarily due to a significant drop in energy prices, such as Brent crude oil, which has fallen by 25 percent since November last year.
When monitoring fundamental demand-driven inflation pressures in the economy, it is better to focus on core inflation, which excludes volatile energy and food prices.
Looking at core inflation in key economies and the Czech Republic, it is evident that China is the only country currently not facing inflationary pressures, with core inflation reaching just 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 already a problem in Japan, where it reached 2.6 percent in May.
The graph provided in the article shows a clear upward trend in core inflation since the beginning of last year. Core inflation in the United States and the eurozone stood at 5.3 percent. It is clear from the inflation curves of these two economies that the process of disinflation has not even begun.
Among the countries analyzed, the Czech Republic has the highest core inflation, reaching 10.3 percent in May with a peak of 14 percent in October last year.
If energy prices were to rise again in the coming period, overall inflation would have a strong tendency to accelerate across the global economy. This puts central bankers in a difficult position, as they may have to further increase interest rates, which could negatively impact economic growth and financial stability. Therefore, it is likely that inflation will not return to the central banks’ two percent inflation targets and instead settle significantly higher, around five percent, in the medium term.
From a global perspective, there are several long-term secular pro-inflationary factors that exceed central banks’ inflation targets. These include deglobalization, demographic trends, and the peak of cheap energy.
Overall, the article suggests that inflation is likely to remain higher than desired and that central banks may face challenges in controlling it.
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