Week in FX Europe – Global Inflation On The Move

It’s no major surprise to see that global inflation has continued to pick up gradually in recent months. It reached +2.0% in July from +1.3% in the previous month. The ‘usual suspects’ have been affecting the non-core price component – increases in world food prices and heightened tension in the Middle East. The region that has had the biggest impact has to be the Emerging Markets – in recent weeks FX depreciation has been their downfall.

However, looking at core-inflation, it’s a totally different scenario, almost every economy has referred to subdued inflation via Central Bank rhetoric. Global core-inflation has stabilized at a relatively low +1.5%. Analysts note that the increase in global inflation “will only be slow as the elevated degree of inflation persistence (past events having an effect on present) should continue to keep inflation well under control.”

A common complaint from most countries is that they have “experienced a fall in persistence over time.” The success of inflation targeting will always be explained by central bankers – self-adulation. Investors nowadays expect any departures of inflation from target will be temporary if their country’s policy makers are ‘not asleep at the wheel.’ Central Bankers have a creed to apply “effective and credible policies” to stabilize domestic inflation.

Despite a widespread fall in global inflation ‘persistence,’ it does differ from country to country, having an impact on the conduct of monetary policy in a specific country. Next week, the Fed is the go to story. Despite the US being a country with relatively low inflation should not prevent the FOMC from tapering. Why not? Analysts note that a lower degree of persistence could mean that inflation could return in a short space of time.

In the euro zone, the high level of persistence allows Draghi and Carney room to keep its ‘forward guidance’ intact. For Governor Kuroda at the BoJ, the recent fall in persistence should support the BoJ in reaching a higher level of inflation. The Emerging Markets have been on top of it for a number of years, receiving kudos from the developed.

• Greek Unemployment Rises to 27.9 Percent
• Europe Closer to Banking Union ECB Granted New Powers
• French Finance Minister Favours Spending Cuts to Tax Hikes
• Spanish Debt Reaches Record High in June
• Carney believes his policy is Supporting U.K. Economic Recovery
• BOE’s Carney warns about Overheating Housing Market
• Europe Clears Critical Hurdle for Banking Reform
• Renewed Confidence in the European Economy
• European Union Head Warns About Delaying Needed Reforms
• ECB Member Expects Greece To Need One or Two Additional Bailouts
• France Could Revise 2014 GDP Growth Downward
• UK Unemployment Rate Drops to 7.7 Percent Putting Pressure on BoE
• UK Think tank Warns GDP Growth Could Be Limited to 1 Percent
• U.K. Housing Gathers Pace
• G20 Tax Information Will Be Shared by 2015

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