Gerard Burg, Senior Economist at NAB, points out that headline consumer prices in advanced economies have been weak in recent years – particularly across 2015 and the first half of 2016 – despite highly expansionary (and in many cases, unconventional) monetary policy.
“A range of factors have contributed to this trend, including deflation in many Chinese goods exports – a trend evident for a number of years. China’s growing market share in key consumer goods segments has increased global deflationary pressures, posing a challenge for inflation targeting central banks.”
“The post GFC period has been one of typically low levels of inflation in advanced economies – particularly over 2015 and the first half of 2016, when weighted average headline inflation drifted near zero. A longer term contributor to the softening inflation trend has been the increasing penetration of Chinese producers into global durable goods markets. China is also a major exporter of capital goods and components – which has generally lowered the cost of production of consumer goods manufactured in other regions.”
“In recent years, there has been a close relationship between China’s export prices, producer prices and global commodity prices. Despite some volatility in individual markets in recent times, aggregate commodity prices have been trending lower since the early part of 2017 and NAB Economics expect further (albeit modest) declines across the next two years. This would suggest that the inflationary boost experienced in advanced economies related to global commodity price movements, including through its effects on higher Chinese export prices, is likely to unwind in coming months.”
“The relatively weak levels of inflation in advanced economies in recent years have been a multi-faceted problem – with the deflationary effects of Chinese goods exports being one part of the equation. Given the current challenges faced by advanced economy central banks to meet inflation targets, easing global commodity prices – flowing through to Chinese and other major exporter goods prices – could provide a stronger headwind to advanced economy headline inflation.”
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