- The next move in global inflation is down. Consumer price inflation surged to 3.7%oya in May, a rate last seen in late 2008. Much of this rise reflects rising commodity prices which have now stabilized. By early next year we anticipate global inflation to fall below 3%.
- The latest data show that month-on-month inflation is subsiding. This development will lift household purchasing power and global growth in the coming months. It also will calm central bank fears and slow the process of policy normalization. In the EM, where policy rates have risen about 100bp over the past year, we look for less than 50bp of additional tightenin g over the coming 12 months.
- Global core inflation also is expected to moderate. In the EM, there has been significant passthrough from commodity prices to core consumer prices, and this impulse is expected to fade.
- In the developed world, the rise in core inflation over the past year has surprised us. In part, this reflects the success of central banks in anchoring medium-term inflation expectations even as core inflation remains below targeted levels. With slack exerting a more modest disinflationary impulse, anchored expectations implie a neutral domestic inflationary impulse in the developed world on average.
- Any relief on global core inflation is likely to prove transitory. In a world with anchored inflation expectations, overheating EM economies, and a large, but narrowing, DM output gap, core inflation is likely to move higher. Thus, the underlying trend in core inflation, both in the EM and the DM, remains up.
- The rising importance of EM price-setting dynamics has two implications for the developed world. First, as EM core inflation moderates over the coming year, DM core inflation should also move lower. Second, EM countries are overheating, and the fall in core inflation is expected to prove temporary. As EM core inflation firms into 2012, it is likely to be accompanied by a rise in DM core inflation as well.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/07/GlobalIssues-InflationDBrcKL_final.pdf
J.P.Morgan
Economic Research