Central bankers are realising that whatever goes on abroad matters more than ever to inflation at home.
In the past month, policy makers from Ottawa to London have used speeches to highlight how their local inflation rates may be driven by events outside their control, complicating their ability to set the right monetary policy.
“There is evidence that fluctuations in global inflation account for a large and growing share of the variation in inflation in individual economies,” Bank of Canada Governor Stephen Poloz said February 24. “How does this affect our ability to target domestic inflation?”
Bank of England Governor Mark Carney noted in a March 12 speech that the correlation between inflation rates in major economies grew in the wake of 2008’s financial crisis. If recent weakness persists, there is a risk of “a self-fulfilling fear of a bad outcome,” he said.
Carney forecasts UK inflation will turn negative this year for the first time in more than five decades. Price growth slowed to 0.1 percent in February from 0.3 percent in January, according to the median forecast of economists before a report on Tuesday.
While Federal Reserve Chair Janet Yellen said last week that declining energy and import prices are likely to be a transitory influence on inflation, officials signalled they are finding it trickier than they originally thought to separate US monetary policy from the rest of the world amid a soaring dollar.
Among those on Wall Street tuning into such a threat is Gustavo Reis, an economist at Bank of America Merrill Lynch in New York. By adopting a worldview when assessing the outlook for central banks, he predicts even more monetary easing this year after 25 central banks already injected fresh stimulus.
That’s because BofA Merrill Lynch’s measure of global inflation has dropped to about 1 percent, the weakest since the recession year of 2009, amid tumbling oil prices. Even stripping out volatile elements leaves the bank’s so-called trimmed inflation indicator at 1.5 percent over the past six months.
“In short, the current episode of global disinflation has heft,” Reis told clients in a March 20 report.
That’s bad news for policy makers because global price trends are increasingly important, he said. He calculates that in the past 15 years, three common factors explained inflationary shifts for countries composing 85 percent of the world economy. Those are commodity costs, long-term influences such as better Asian supply-chains and the dollar.
A world more connected means more pressure to keep policy easy, said Reis, who predicts more action from the central banks of China, Russia, Colombia, Turkey, India, Indonesia and Poland before the end of the year.
“Global inflation is heading down, with momentum,” said Reis. “And this matters more than it used to.”
