• Home
  • About
  • Newsletters
  • Conference
  • TMS Links
  • Calendar
  • Log In
  • Register

Room 151

  • 151 BRIEF

    What's New?

  • London CIV launches sustainable equity fund

    April 19, 2018

  • Council funding boost for stadium for Cornwall

    April 18, 2018

  • Herts creates development joint venture

    April 18, 2018

  • Half of councils ‘draw down on reserves’

    April 18, 2018

  • Northants completes HQ sale

    April 18, 2018

  • Ashford adopts commercial property strategy

    April 18, 2018

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • Agent 151
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • David Green
    • Richard Harbord
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
    • Stephen Sheen
  • Interviews
  • Jobs

What’s behind the fall in inflation?

0
  • by James Bevan
  • in James Bevan
  • — 1 Oct, 2014

jb-banner-grey

Market-implied inflation rates have been collapsing globally and have led some to question whether this will cause policy makers to leave monetary policy at near-maximum accommodation, even in the US. While the decline in inflation is real, there looks to be more to the story than meets the eye.

As a first observation, the decline in break-evens, or what markets discount as the gap between conventional and inflation protected government securities, appears closely correlated between US and European inflation markets but the underlying stories don’t seem to be the same. Thus recent weakness in the oil price doesn’t have a constant impact on the different regions, and may be a key issue for the US but not for Europe.

As a second observation, despite the apparent correlation between the moves globally, US inflation has fallen across the curve, while in Europe it is mainly an issue for the 10y part of the curve, and this speaks to more idiosyncratic factors related to negative carry and an imbalance in supply/demand in Europe, against a re-pricing lower of longer-term growth and inflation expectations. Indeed lower inflation looks to have become something of a “new norm” for Europe. As a technical aside, European 5y5y breakevens are now less than 2%, and whilst there is a stronger medium-term trend of inflation expectations in the US relative to Europe, as illustrated by the spread between 5y5y inflation swaps in both markets, the recent weakness in US inflation appears broad based, with core inflation slower in recent months on the back of relentless deflation in oil prices, and TIPS breakevens have declined noticeably, moving to become distinctly unattractive.

With US core goods inflation non-existent or actually negative, it’s services inflation that’s holding up core, and assuming 0% core goods inflation, core services need to maintain trend inflation of 2.7%yoy for overall core inflation to be at 2%. Most services components had been hovering around this sort of level since April 2013 (after the sequestration-driven Medicare cut that drove medical inflation down) but in recent months, only shelter inflation has been over 2% at the core level, and the other components have slowed and in medical services, private providers appear to be delivering important downside pressure on inflation in that particular component. Whilst private insurers’ inflation rarely falls below medicare price increases or the average for hospitals, those levels are being approached, so stabilization may be on the way and we cannot see a fundamental driver for softer education/transportation services inflation, suggesting that the soft patch in inflation may be temporary and not become a substantial risk to expectations of higher rates as the year progresses.

The key data and news flow focus this week will likely be US payrolls and the ECB meeting. Consensus for US September ADP employment is 202,000, and after last month’s stumble in payrolls, we can expect a 210,000 to 215,000 rise in payrolls in September and perhaps a 0.1pp decline in the unemployment rate to 6.0%. A less optimistic expectation might be 6.1%, so still very low, and on consensus, hourly earnings are expected to rise c0.2%mom. Meanwhile, Eurozone 5y5y inflation breakevens are below levels seen before Jackson Hole and it’s apparent that some market participants are beginning to expect a lot from Mr Draghi, with demands for more stimulus over and above what the ECB has announced thus far. But we can expect such demands to be disappointed, with the ECB likely to maintain a wait-and-see stance whilst it assesses its new tLTRO and asset purchases programs, before embarking on anything further – and all that we can reasonably expect from the ECB are details of their ABS and Covered Bond purchase programmes.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

Share

You may also like...

  • ECB reliant on ‘confidence’ ECB reliant on ‘confidence’ 19 Dec, 2011
  • James Bevan: Beneath the surface of declining oil prices 15 Dec, 2014
  • The US presidential election: immediate reflections on Mr Obama’s victory The US presidential election: immediate reflections on Mr Obama’s victory 7 Nov, 2012
  • The case for Japanese equities The case for Japanese equities 5 Apr, 2012

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register for the Room 151 Weekly Email Digest

  • Latest tweets

    Room 151 6 hours ago

    Herts agrees JV with Morgan Sindall to develop 500 homes: Hertfordshire County Council has signed a deal to create a 50/50 development joint venture with construction firm Morgan Sindall. The council will use its standalone company, Herts Living Ltd… dlvr.it/QQ5ZZg

    Room 151 11 hours ago

    #localgov @JRolfe67 #housing #regeneration twitter.com/SHJFitzgerald/…

    Room 151 11 hours ago

    London CIV launches sustainable equity fund room151.co.uk/brief/#london-… #localgov #lgps

    Room 151 11 hours ago

    #localgov twitter.com/Rebecca_DTZi/s…

    Room 151 12 hours ago

    Newham in danger of missing deadline to publish accounts: The London Borough of Newham is in danger of missing its deadline to publish audited financial statements due to a lack of capacity in its finance team, according to auditors.[...] dlvr.it/QQ3RFn pic.twitter.com/S35NTpUMSJ

    Room 151 15 hours ago

    Enfield funds new housing association with right to buy receipts: The London Borough of Enfield has agreed to fund the creation of a new housing association in which it will take a minority stake, in order to spend £50m of[...] dlvr.it/QQ2hqH pic.twitter.com/Q8Dc5eQuyY

    Room 151 1 day ago

    Council funding boost for stadium for Cornwall room151.co.uk/brief/#council… #infrastructure #development

    Room 151 2 days ago

    Herts creates #development joint venture room151.co.uk/brief/#herts-c… #housing #property

    Room 151 2 days ago

    Half of councils ‘draw down on reserves’ room151.co.uk/brief/#half-of… #localgov #lgps #treasury

    Room 151 2 days ago

    Northants completes HQ sale room151.co.uk/brief/#northam… #localgov

    Room 151 2 days ago

    Ashford adopts commercial #property strategy room151.co.uk/brief/#ashford… #localgov #lgps #housing #treasury

    Room 151 2 days ago

    Government's terms for #businessrates review published room151.co.uk/brief/#terms-f… #localgov #mhclg

    Room 151 2 days ago

    Good chat with LPP's Chris Rule about #LGPS investment in #housing and #regeneration @LPFA1 room151.co.uk/interviews/lgp… #localgov

    Room 151 2 days ago

    #localgov #lgps twitter.com/kshackleton1/s…

    Room 151 2 days ago

    LGPS Pools Roundup: Access appoints Link, CIO for Border to Coast, Central launches funds, new chair for Northern Pool: ACCESS Link wins pooling contract ACCESS  has appointed Link Fund Solutions Ltd to establish and operate its authorised contractual… dlvr.it/QPq8BJ

    Room 151 2 days ago

    Five LGPS funds invest £100m in the private rented sector: Five pension funds agreed last year to commit £100m to a fund aimed at building and managing housing in the private rented sector. Room151 reveals how it came about. The[...] dlvr.it/QPq00D pic.twitter.com/MHjD2vWny2

    Room 151 2 days ago

    Changing the Guard: New Fed leadership and what’s ahead for the world’s most important central bank: Sponsored Article: A change in leadership often sparks intrigue from investors—particularly when the leader is the chair of the world’s most important… dlvr.it/QPpzwx pic.twitter.com/9JWmWJXLzq

    Room 151 2 days ago

    LGPS Q&A: Chris Rule of Local Pensions Partnership on housing and regeneration: Interest in housing and regeneration among institutional investors is growing. In an exclusive interview for Room151, Chris Rule discusses the Local Pensions Partnership’s… dlvr.it/QPpqBS pic.twitter.com/CwuKp8m2ur

    Room 151 2 days ago

    Jeff Houston: LGPS and investment cost transparency: The LGPS Advisory Board has been the first to sign up to a new disclosure template for investment costs. Jeff Houston explains what’s happening and why. It seems a very[...] dlvr.it/QPpq0Y pic.twitter.com/gxW8PinJpX

    Room 151 3 days ago

    Karen Shackleton: The cost conundrum of active managers: LGPS is in a better position to assess the cost of active managers, even if it remains difficult. It is common sense to take costs into account when judging the[...] dlvr.it/QPpfZ1 pic.twitter.com/gfVirgWcy2

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Cllr John Clancy
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
  • Archives

    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Districts show resilience through austerity
  • Next story Audit report flags up shortcomings at Babergh

© Copyright 2018 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK