Commodity Collapse Keeping Inflation At Record Lows: FactSet

It looks like collapsing global commodity prices have knocked out inflation, at least for the time being. As Sara Potter, Market Insights VP for FactSet points out, many major commodity prices have dropped precipitously over the last year or so. She notes, for example,  that West Texas crude is now off 56% from a year ago, gold has fallen by 15% over the last 12 months, copper is down 27%, and sugar has slipped by close to 35% in the past year.

Commodity Collapse Inflation

This collapse in commodity prices has led to to record low inflation rates for developed nations across the globe. Organization for Economic Cooperation and Development data show Consumer Price Index (CPI) inflation for member countries was a mere 0.6% year-over-year in June, with the major G7 nations only seeing a paltry 0.2% annual inflation. Of note, the current inflation rates are the lowest since 2009 in the aftermath of financial crisis.

More on U.S., UK and global inflation

Potter highlights that overall inflation is very low in both the U.S. and UK; U.S. CPI ticked up 0.2% in June year over year, while the UK saw prices remain flat  year over year. While core CPI is running higher in both economies, it is still far from problematic. Core CPI (excluding food and energy) was up 1.8% in June in the United States, while in the UK, CPI excluding energy, food, alcohol and tobacco edged up a mere 0.8% from June of last year.

Commodity Collapse Inflation

Of note, U.S. year-over-year real GDP growth has averaged 2.5% over the last six quarters, while the UK has averaged 2.9% growth over that year and a half period. Consensus analyst estimates are for growth rates for both countries to stay above 2% well into 2016. Both nations have also seen their unemployment rates come down in the last few years. The U.S. unemployment rate has battled back from a high of 10.0% in October 2009 to just 5.3% in July of this year, while UK unemployment has improved from a peak of 8.5% in October of last year to 5.6% in May of 2015.

Potter also notes that “policymakers at both the Fed and the BOE are sounding increasingly hawkish on inflation.” She argues that with growth accelerating and relatively strong employment, the central banks are considering making moves to curb expected inflation.

Commodity Collapse Inflation

Most analysts anticipate an upward move by the Fed in the next month or so, while the BOE is expected to wait until next year to boost interest rates. That said, the ongoing devaluation of the Chinese yuan by the PBOC could throw a monkey wrench in the fed’s plans for a rate hike in the immediate future. A weak yuan is likely to increase the U.S. trade deficit with China, given it will make U.S. exports more expensive and imports from China cheaper. A weaker renminbi also puts upward pressure on the dollar, which some observers say could lead the Fed to delay its expected September rate hike.

There are a few exceptions to the low-inflation environment worldwide, notably in several emerging market nations. In fact, two of the largest global emerging economies are seeing high inflation right now. Brazil reported a 9.6% annual inflation rate in July, and Russian citizens are also having to deal with a 15.6% annual inflation rate as of July.

Commodity Collapse Inflation