Why inflation keeps surprising on the downside? – HSBC


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Inflation is surprising to the downside across the globe as oil effects wash out and it remains structurally constrained and analysts at HSBC expect inflation to remain subdued in most countries which means that central banks will struggle to meet their targets.

Key Quotes

Over-inflated expectations

Lower than expected inflation is a global issue. Of the 20 inflation surprise indices that we publish, 19 are now moving down or sideways, with the UK the one exception. This is a reversal of a trend early in 2017 when inflation spiked up due to higher oil prices. As these base effects have washed out, inflation has started to fall; however, forecasts have proved stickier, and have not declined to the same degree as the actual releases.”

We expect subdued inflation in most countries…

We expect this trend to continue and for inflation to remain subdued in most countries. Indeed, we recently cut our already low 2017 inflation forecasts for both developed and emerging markets. Lower commodity prices have played a big role in this shift but going forwards we expect inflationary pressures to remain muted. One explanation is that the legacy of the 2008 global financial crisis, namely high debt, weak growth and lower inflation expectations are holding back inflation. But, equally, the digital revolution, both in terms of consumer price information and automation, is restraining price increases.”

“…something that the inflation market is already pricing in…

Inflation markets appear to be preparing for this eventuality. In both the eurozone and the US, inflation forwards are falling, suggesting structurally lower inflation. At the same time, lower market-implied inflation volatility suggests fewer worries about extreme moves in inflation – either towards hyperinflation or deflation.”

“…and which leaves limited scope for policy tightening…

This trend is unlikely to go away any time soon, which poses a challenge to central banks already struggling to hit their inflation targets. Further out, this could perhaps lead to a rethink of central bank mandates. In the short term though, it should mean limited scope for policy tightening.”

…although some central banks appear willing to move anyway

We believe there is little prospect of an early tapering of ECB asset purchases, and lower inflation should hold back the Fed’s pace of tightening and allow for rate cuts in Latin America, Russia and India. However, the Bank of Canada has shown that some central banks may be willing to move despite low inflation, and we expect rate rises in Australia, New Zealand and Sweden in 2018.”

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