• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • WMCA signs £4bn investment agreement with L&G

    May 18, 2022

  • Bill will give UK Infrastructure Bank power to lend directly to councils

    May 18, 2022

  • £400bn pension group collaborates on climate transition initiative

    May 17, 2022

  • CIPFA rejects proposal for vote on publication of fraud hub report

    May 17, 2022

  • John Turnbull elected president of the SLT

    May 12, 2022

  • Pension pool identifies biodiversity as a priority

    May 11, 2022

  • 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
  • Briefs

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...

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 11 hours ago

    Back to the future for the PWLB: The Public Works Loan Board is tightening its lending criteria to ensure that loans will be repaid by local government borrowers. But, asks Peter Findlay, shouldn’t they have been doing[...] dlvr.it/SQcmmm pic.twitter.com/bVv4fe0Xlv

    Room151 12 hours ago

    Great piece from Peter Findlay on the PWLB’s tightening of its lending criteria. He raises some pointed questions for the Treasury and explains why the ‘casino council’ characterisation was simplistic and inaccurate. #PWLB #localgov room151.co.uk/treasury/back-…

    Room151 13 hours ago

    The Queen's speech highlighted the need for accelerating UK infrastructure investment into levelling up projects and cutting emissions. @UKInfraBank #QueensSpeech #ClimateAction #emissions Click the link below to read 🔻🔻 room151.co.uk/brief/bill-wil… pic.twitter.com/hFmF2veVIa

    Room151 13 hours ago

    Huge funding heading to the @WestMids_CA from @landg. @andy4wm #LevellingUp #netzero #regeneration Click the link below to read 🔻🔻 room151.co.uk/brief/wmca-sig… pic.twitter.com/ajhZhia6mx

    Room151 17 hours ago

    LGPS governance, Cagney and Lacey style: What regulatory response can be expected following the publication of the Good Governance project’s Phase 3 report and the closure of the Single Code of Practice consultation? Susan Black offers[...] dlvr.it/SQbfXf pic.twitter.com/xwqHOEu2AP

    Room151 2 days ago

    More evidence of the importance of emerging markets in the journey to net-zero. @BordertoCoast @BrunelPP @northernlgps @EAPensionFund @WYPF_LGPS Click the link below to read 🔻🔻 #LGPS #NetZero #NetZeroCarbon #EmergingMarkets room151.co.uk/brief/400bn-pe… pic.twitter.com/qCm0EGxzLn

    Room151 6 days ago

    ‘Urgent consultation’ issued in response to continuing audit delays: CIPFA and the Local Authority Scotland Accounts Advisory Committee (LASAAC) have announced another “urgent consultation” to consider proposals to address the latest issue that has led… dlvr.it/SQJ0kV pic.twitter.com/s6vw0bnGXO

    Room151 7 days ago

    Bags of capacity – now to housing delivery: HRAs have been freed up and councils are starting to invest, but some remain cautious, writes Steve Partridge. He suggests that a minimum of £10bn of additional borrowing could be[...] dlvr.it/SQDvxk pic.twitter.com/yZmoWzHv6U

    Room151 7 days ago

    Bags of capacity – now to housing delivery room151.co.uk/treasury/bags-…

    Room151 1 week ago

    To Michael Gove: a modest proposal: Conrad Hall has written an open letter to the levelling up secretary suggesting an unusual (and tongue-in-cheek) proposal to help councils predict next year’s government grant. Dear Secretary of State,[...] dlvr.it/SQ9GpX pic.twitter.com/mSX1xgeL8a

    Room151 1 week ago

    Queen’s Speech: an ambitious plan hampered by omissions: Richard Harbord examines the impact of the government’s legislative proposals on councils, and concludes that local authorities expect and need more from central government. However you view the… dlvr.it/SQ8hmP pic.twitter.com/BsnziyNPIO

  • Categories

    • 151 News
    • Agent 151
    • Audit
    • Blogs
    • Business rates
    • Chris Buss
    • Cllr John Clancy
    • Council tax
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Education
    • Forum
    • Funding
    • Governance
    • Graham Liddell
    • Housing
    • Ian O'Donnell
    • Infrastructure
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • Levelling up
    • LGPS
    • Mark Finnegan
    • Net Zero
    • Private markets
    • Recent Posts
    • Regulation
    • Resources
    • Responsible investing
    • Richard Harbord
    • Risk management
    • Social care
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Transport
    • Treasury
    • Uncategorized
    • William Bourne
  • Archives

    • 2022
    • 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 2022 Room 151. Typegrid Theme by WPBandit.

0 shares