Global Inflation Outlook
With the Evergreen ship, the Ever Given, having been successfully refloated yesterday from being stuck in the Suez Canal for the past week, the effects from having held up around $10Bn worth of goods are now being discussed about. Naturally, with the talks surrounding how has this event led to an increase in prices across the supply chain (oil prices being a top concern), the conversation around inflation is starting to pick up and be taken more serious. In recent weeks the talks around inflation has been downplayed by a noticeable amount of people, which they argue that the past decade of low inflation, due to the slow recovery from the 2007-2009 Great Recession, and the lack of wage growth has many wondering whether inflation is even still the threat it once was not too long ago in the 1970’s. Whether it is still a huge threat or not it is in our best interests to keep track of inflation and the factors that may have an impact on them. For instance, the U.S. has been focusing their efforts on keeping interest rates low to help facilitate monetary easing. Recently Jeremy Powell, head of the Federal reserve, has come out right and stated that they will not worry about inflation concerns for now, but that instead their focus is making it easier for the economy to pick back up which requires keeping interest rates near the zero bound.
The U.S. federal reserve, as recently as August 2020, has set up an average inflation targeting system. The average inflation target differs from the traditional inflation targeting monetary policy that the Federal Reserve has been conducting in recent years by focusing on reaching 2% average inflation in the long run. What this means is that since inflation has been below 2% on average for the past decade, the Federal Reserve will focus on pushing inflation to above 2% so that the long-run inflation rate averages out to around 2%. The Bank of Japan (BOJ) on the other hand set up QQE (qualitative and quantitative monetary easing) with yield curve control. Their focus is on overshooting inflation to above 2% and keeping interest rates low to facilitate this inflation-boosting economic environment. Since 2000 Japan has dealt with deflation with their bond rates at -0.1% and their interest rates at the near zero bound.
Over at the Bank of England (BOE), they have projected that inflation is expected to rise to 2% spring 2021 and stay there until Q4 2021. With their focus on inflation targeting, their aim to reach 2% inflation does not involve any overshooting, unlike Japan and the U.S., so if all else stays the same it would seem like inflation in the UK may only steadily rise instead of drastically increasing, or at least any attempts to rise inflation will be somewhat modest. The European Central Bank (ECB) also has 2% inflation projected for 2021, but more so near Q4. Going into 2022 they do expect inflation to drop down towards 1% before rising to around 1.4% in 2023. Just like the BOE, the ECB monetary policy is more so focused on increasing inflation in a modest manner.
The Reserve Bank of Australia is focusing on keeping their “cash” rate low until they can get their inflation rate within the 2-3% range. Due to spare capacity and a higher-than-average unemployment rate, wages are expected to remain low for some years to come. Just like the Bank of England and the European Central Bank, the Reserve Bank of Australia is also focused on an inflation targeting approach but with 2-3% being their primary focus rather than just 2%. This would give them more room to overshoot inflation if necessary, which is similar to the Federal Reserve’s average inflation targeting.
With the Central Banks keeping their focus on keeping interest rates low for monetary easing, this will inevitably lead to higher inflation rates, which seems to be the global consensus on where Central Banks should focus their efforts going forward for the next few years. As of right now the Federal Reserve has set up an outline to not raise interest rates until 2024, but if inflation becomes to unstable and rises above expectations prior to 2024 this could result in the Fed raising interest rates before they have set out to. Investors on the other hand have been weary of the Fed’s decision to keep interest rates low until then, which has been seen in the bond yields rising as bond investors sell off more of their holdings. This could become an issue as the U.S. Treasury is still focused on borrowing from investors to fund their plans to combat the covid pandemic and possibly to help fund their infrastructure development plans. In short, the rise of inflation seems like it here to stay for the next couple of years.
References:
https://www.rba.gov.au/education/resources/in-a-nutshell/monetary-policy-in-australia.html
https://www.bankofengland.co.uk/monetary-policy-report/2021/february-2021