The issue of inflation is one which regularly makes the headlines in the financial media. However the credit crunch era has seen several clear changes in the inflation environment. The first is the way that wage and price inflation broke past relationships. There used to be something of a cosy relationship where for example in my country the UK it was assumed that if inflation was 2% then wage growth would be around 4%. Actually if you look at the numbers pre credit crunch that relationship had already weakened as real wage growth was more like 1% than 2% but at least there was some. Whereas now we see many situations where real wage growth is at best small and others where there has not been any. For example the “lost decade” in Japan which of course is now more than two of them can in many respects be measured by (negative) real wage growth. Even record unemployment levels have failed to do much about this so far although the media have regularly told us it has.

At first inflation dipped after the credit crunch but was then boosted as many countries raised indirect taxes ( VAT in the UK) to help deal with ballooning fiscal deficits.. There was also the really rather odd commodity price boom that made it look like all the monetary easing was stoking the inflationary fires. I still think the bank trading desks which were much larger back then were able to play us through that phase. But once that was over it became plain that whilst via house prices for example we had asset price inflation we had weaker consumer price inflation which around 2016 became no inflation for the latter and for a time we had disinflation. This was the time when the “Deflation Nutters” became a little like Chicken Licken and told us the economic world would end. Whereas that was in play only in Greece and for the rest of us things changed as easily as an oil price rise. Also recorded consumer inflation would not have been so low if house and asset prices were in the measures as opposed to being ignored?

What about now?

The United States is in some ways a generic guide mostly because it uses the reserve currency the US Dollar. Whilst there have been challenges to its role such as oil price in Yuan it is still the main player in commodities markets. Yesterday we were updated by  on what is on its way.

The Producer Price Index for final demand rose 0.3 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices advanced 0.5 percent in May and 0.1 percent in April.  On an unadjusted basis, the final demand index moved up 3.4
percent for the 12 months ended in June, the largest 12-month increase since climbing 3.7 percent in November 2011.

As we look at the factors at play we see the price of oil yet again as it looks like being an expensive summer for American drivers.

Over 40 percent of the advance in the index for final demand services is attributable
to a 21.8-percent jump in the index for fuels and lubricants retailing.

There was also maybe a surprise considering the state of the motor industry.

A major factor in the June increase in prices for final demand goods was the index
for motor vehicles, which moved up 0.4 percent.

We can look even further down the chain to what is called intermediate demand.

For the 12 months ended in June, the index for
processed goods for intermediate demand increased 6.8 percent, the largest 12-month rise since
jumping 7.2 percent in November 2011.

As you can see this is moving in tandem with the headline but do not be too alarmed by the doubling in the rate as these numbers fade as they go through the system as they get diluted for example by indirect taxes and the like. Peering further we see a hint of a possible dip and as ever the price of oil is a major player.

For the 12 months ended in June, the index for unprocessed goods for
intermediate demand increased 5.8 percent…..Most of the June decline in the index for unprocessed goods for intermediate demand can be traced to a 9.5-percent drop in prices for crude petroleum.

Such numbers which we call input inflation in the UK are heavily influenced by the oil price and in our case around 70% of changes are the Pound £ and the oil price. As the currency is not a factor for the US so much of this is oil price moves. That is of course awkward for central bankers who consider it to be non core.If you ever are unsure of the definition of non-core factors then a safe rule of thumb is that it is made up of things vital to life.

Commodity Prices

We find that if we look at commodity prices the pressure has recently abated. Yesterday;s falls took the CRB Index to 435 which compares to the 452 of a month ago and is pretty much at the level at which it started 2018 ( 434). The factor that has been pulling the index lower has been the decline in metals prices. The index for metals peaked at 985 in late  April as opposed to the 895 of yesterday. highlighted this yesterday.

Two weeks ago, Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch,said Trump’s push to disrupt Iranian oil production could cause oil prices to hit $90 per barrel by the end of the second quarter of next year. Others have forecasted even higher prices, breaching the $100 plus per barrel price point.

Unfortunately for them whilst they may turn out to be right there are presentational issues it informing people of that on a day when events are reported like this by the BBC.

Brent crude dropped 6.9% – the biggest decline in more than two years – to end at $73.40 a barrel for the global benchmark………Wednesday’s sell-off started after the announcement by Libya’s National Oil Corp that it would reopen four export terminals that had been closed since late June, shutting most of the country’s oil output.


We see that the move towards higher inflation has this month shown signs of peaking and maybe reversing. Of course some of this is based on a one day move in the oil price but there are possible reasons to think that this signified something deeper. From Platts.

Russia and Saudi Arabia raised their oil production by a combined 500,000 b/d, and OPEC crude output hit a four-month high of 31.87 million b/d in June, reflecting agreement on easing output cuts, the IEA said Thursday.

Another factor is the Donald as President Trump is in play in so many areas here via the impact of his trade policies which have clearly impacted metals prices for example.Also his threats to Iran pushed the oil price the other way.

For those of us who do not use the US Dollar as a currency there is another effect driven by the fact that it has been strong recently which will tend to raise inflation. This will be received in different ways as for example there may have been a celebratory glass of sake at the Bank of Japan as the Yen weakened through 112 versus the US Dollar but others will (rightly) by much less keen. This is because returning to the theme of my opening paragraph wage growth has plainly shifted lower worldwide which means that those who panicked about deflation actually saw reflation as real wages did better.

As a final point it is hard not to have a wry smile at yesterday’s topic which was asset price inflation on the march in Ireland. So much of this is a matter of perspective.