ChartBrief 110 – Global Inflation Trends

Global Inflation Trends

Recently the main talk in markets was reflation, but about 2 years ago everyone was talking about deflation: why deflation was structural, all the thematic aspects of deflation, and new normal and new paradigms.  But in the end it appeared to be cyclical or transitory – as the chart below shows.  The chart shows the proportion of countries in ‘deflation’ (negative YoY change in headline CPI), which peaked about 40% in early 2015.  The main driver was falling commodity prices, hence the transitory nature of it.  But it was the largest, longest and most widespread episode of “deflation” that we’ve seen in recent history.  Transitory or not, that kind of experience can have a big impact on investor psychology.

 

Copper Is Cheap As China Consumes 50% Of Global Supply

So in that respect it's understandable that inflation expectations remain muted, with the deflation scare still lingering in investor minds.  While inflation expectations have rebounded in Europe and America, there's probably still at least 50bps of potential upside for both on mean reversion argument alone.  Breaking down the components or drivers of nominal sovereign bond yields, inflation expectations are a key element and an uplift here would drive further upside in bond yields.  The catalyst to drive repricing of inflation expectations may just be time - more time with no deflation.  Overall though our view has been for a gradual move higher in inflation globally on the basis of better growth, shrinking spare capacity, rising property prices in the major economies, and stable commodity prices.  Hence we remain tactically bearish on bonds and expect growth assets to outperform in the medium term.

After the peak of the deflation scare in 2015 there has been a sudden transition away from deflation. Is the next step a period of hyperinflation? (or at least higherinflation)

Inflation expectations remain below average, and a mean-reversion driven repricing could add further upside to bond yields.  What's needed for that is more time without the deflation that we just went through and a continuation of the trend of rising property prices, shrinking spare capacity, and stable commodities.

Global Inflation Trends

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About the Author

Top Down Charts
Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.

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