Tide's out for inflation across global shores

Low Chinese inflation suggests growth will remain close to 2013 forecasts of a little over 8 per cent, while a low Australian CPI later this month could trigger a rate cut.

In China, the strongest economy in the world, inflation is well in check. It is part of a global phenomenon that is increasingly suggesting a low inflation current global economic recovery over the next few years. 

In the year to March, the Chinese consumer price index rose just 2.1 per cent, undershooting expectations for a 2.5 per cent increase and down markedly from the 3.2 per cent inflation rate recorded in February. The sharp fall in the CPI in March was due to a seasonal fall in food prices, although other components were also softer.

At the same time, the producer price index confirmed ongoing deflation at the producer level with a 1.9 per cent annual price decline, lower than the 1.6 per cent fall in the PPI in February. The ongoing low inflation rates may reflect the lagged effect of the slower growth recorded in China in 2012 when GDP experienced it softest growth rate since 1999 and is clearly part of the current low global inflation environment.

The inflation undershoot in China suggests the People’s Bank of China can defer any monetary policy tightening for many months, perhaps longer. The PBoC has an inflation target of 3 per cent, a rate that appears unlikely to be exceeded in the current circumstances. The economists at the Commonwealth Bank are forecasting inflation to remain between 2 and 3 per cent right through 2013 and cite a further reversal of some seasonal food price increases as the main grounds for this benign outlook.

Such a well contained inflation rate would be assured if, as seems likely, the rate of GDP growth in 2013 remains close to forecast at a little over 8 per cent. This is now widely seen as the trend growth rate for China, rather than the average of 10 per cent or more over prior decades when China was catching up and industrialising from a very low base.

The news on inflation in China came as a new International Monetary Fund report found that inflation was unlikely to accelerate even as the global recovery strengthens over the next few years. The IMF give two main reasons for the subdued inflation outlook; first that “inflation expectations have become more firmly anchored, or resistant to change, reflecting people’s confidence that inflation will remain close to the targets set by national central banks”. The other reason was linked to a muted inflation response from changes in cyclical unemployment. In other words, as the cycle recovers, wages are likely to remain contained given the vast pools of unemployment created by the Great Recession.

To date, the low inflation climate is being seen throughout the industrialised world due largely to the sluggish growth and the very wide and ongoing output gap which means there is a lot of spare capacity in all economies. Inflation in the US, eurozone and Japan remain well below the central bank targets, despite some of the easiest monetary policy settings ever seen having been in place over the past few years.

In Greece, deflation has been recorded for the first time since 1968 with the CPI down 0.2 per cent over the year to March. While the economic depression in Greece has driven this outcome, it is another example of the overall low global inflation climate.

Sluggish commodity prices are further evidence of the low inflation climate. The various commodity price indices tracked by Reuters, Bloomberg and Standard & Poor’s, have all been flat to lower in recent months. Oil, copper, iron ore are all off their recent highs in a sure sign that global inflation risks are few and far between.

Which brings us to the critically important March quarter inflation data in Australia which is scheduled for release on April 24. Critically important because a low reading, say of 0.5 per cent for the quarter and 2.2 per cent for the annual reading, would open the door a little more for a further interest rate cut from the RBA. There are clear signs of decent growth showing up locally in retail spending, consumer sentiment, house prices, housing construction and business investment which would normally work against an interest rate cut. The labour market also looks to be in good shape which also works against a further rate cut, although tomorrow’s jobs data for March may alter that view.

With the Australian dollar at a fresh 28-year high on a trade weighted basis and some fragile business confidence data showing through, a low CPI could trigger the Reserve Bank to act on its bias to cut interest rates to help ensure growth remains near trend and to prevent inflation moving to an uncomfortably low level.

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