• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

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

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...

  • Thoughts on the US fiscal cliff ‘deal’ Thoughts on the US fiscal cliff ‘deal’ 8 Jan, 2013
  • BoE’s Inflation Report: what would forward guidance mean? BoE’s Inflation Report: what would forward guidance mean? 7 Aug, 2013
  • ‘Sellers strikes’, gilts and QE ‘Sellers strikes’, gilts and QE 11 Aug, 2016
  • James Bevan: All eyes on Central Banks James Bevan: All eyes on Central Banks 3 Dec, 2014

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 1 day ago

    The vaccine may help settle cash flows but inflation remains a risk: Sponsored article: Lauren Sewell examines the prospects for long-term borrowing as Brexit settles and vaccines are deployed against Covid-19. On the 9th October 2019 Whitehall sent… dlvr.it/RqZXCr pic.twitter.com/PzgOZOGQ0k

    Room151 1 day ago

    ESG in liquidity: Sponsored article: Gavin Haywood looks at the integration of ESG in Federated Hermes’ money market funds. Federated Hermes has over 300 public sector clients invested in our AAA rated money[...] dlvr.it/RqZX5f pic.twitter.com/E87sBXsay8

    Room151 2 days ago

    New realities of investing cash and liquidity: “What to do now?”: Sponsored article: Brian Buck looks at the “unique challenge” for cash management strategies. As investors assess the ongoing impact of the pandemic on their business, levels of cash and… dlvr.it/RqVbk9 pic.twitter.com/ZElVASmEUV

    Room151 3 days ago

    Extra finance promised by the government receives a broad welcome: Sponsored article: The financial pressures facing local authorities this year continue to pose challenges for council treasurers. While the launch of the UK’s Covid-19 vaccination… dlvr.it/RqTzTF pic.twitter.com/HCjH0pyHR5

    Room151 3 days ago

    A savvy approach to managing your cash: Sponsored article: Caroline Hedges examines the need for active cash management to achieve a higher than average return. Last year saw the already mountainous pile of negative-yielding debt around the[...] dlvr.it/RqTzMK pic.twitter.com/uP0RQYTJLt

    Room151 4 days ago

    Putting alternatives at the heart of multi-asset portfolios: Sponsored article: Nick Edwardson looks at the assets that provide the “most attractive opportunities”. We believe that asset allocation is the primary driver of investment returns and that the… dlvr.it/RqQ2Qt pic.twitter.com/WLBzvRRRUQ

    Room151 4 days ago

    Thriving in the pandemic: Avoiding the stragglers: Sponsored article: George Crowdy looks at the sectors providing opportunities for sustainable investment. Throughout much of 2020, we talked about why sustainable investing has thrived in the pandemic,… dlvr.it/RqQ2NQ pic.twitter.com/dxiPWKFsPl

    Room151 4 days ago

    The development of CCLA’s mental health benchmark: Sponsored article: Amy Browne examines the importance of investing in mental health in the workplace. We are living through a public health emergency in more ways than one. Physical health[...] dlvr.it/RqQ2Jx pic.twitter.com/o6yRSCX3oF

    Room151 5 days ago

    Brexit: What the EU trade deal means for the UK economy: Sponsored article: Hetal Mehta looks at the impact of Brexit on economic prospects. Four and a half years after voting to leave the EU, on Christmas Eve the UK finally[...] dlvr.it/RqLBDt pic.twitter.com/No62srfE8h

    Room151 5 days ago

    Cash dethroned: The quest for liquid yield: Sponsored article: Peter Hunt and George Carne ask how treasury departments can balance the need for yield and liquidity. The massive stimulus and waves of liquidity provided by central banks[...] dlvr.it/RqLBDj pic.twitter.com/05g6Zhu1kU

    Room151 5 days ago

    Richard Harbord: Delayed “capital determinations” make section 25 opinions a new crunch point: The severe pressure on local government budgets now means section 151 officers confront a tricky call on  whether they can make a judgement on the robustness… dlvr.it/RqLBDV pic.twitter.com/vTAbDKFzkI

    Room151 1 month ago

    PWLB Consultation: Analysis straight from Dickens: Helen Radall and Paul McDermott present a legal examination of the new PWLB borrowing rules as Charles Dickens might have imagined it. Free and easy PWLB (“Marley” to his friends)[...] dlvr.it/RnmwLq pic.twitter.com/yFxcPrQqEG

    Room151 1 month ago

    Room151’s top stories from a momentous year: 2020 was the year in which local government grappled with Covid-19, funding strains, controversy over borrowing rules and the threat of financial collapse. It has been an exhausting and historic[...] dlvr.it/RnlpZg pic.twitter.com/g3myNyox6J

    Room151 1 month ago

    Tracy Bingham: 2020, a year best forgotten but also one of learning: Many will rush to erase 2020 from their memories but, writes Tracy Bingham, there were also many lessons about finance teams, strategic planning and leadership. 2020: A year we’d… dlvr.it/RnlpY2 pic.twitter.com/m7G1krrtCu

    Room151 1 month ago

    Settlement must address ‘precarious’ local government finances: Dan Bates crosses his fingers for “no nasty surprises” in this week’s funding settlement but argues the “bigger prize” is post-Covid financial certainty. Thursday (17 December) should be the… dlvr.it/Rnj9dG pic.twitter.com/KLKjjuBqJE

    Room151 1 month ago

    PWLB consultation: Big change on the way but there are ‘grey areas’ and opportunities: The consultation on PWLB borrowing has concluded creating a new landscape for funding property acquisition. Our experts look at the implications. Tracie Langley The… dlvr.it/RndRvJ pic.twitter.com/KEqXEBmEfq

    Room151 1 month ago

    2021: Better income outcomes?: Sponsored article: Investors should be mindful of structural challenges posed to income generation as a result of rapid thematic change. Jon Bell looks at the prospects for the coming year.[...] dlvr.it/RndRsw pic.twitter.com/TxVk8aXkMq

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • 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 Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 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 2021 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