hat have the Bank of Japan, US Federal Reserve, People’s Bank of China and the Bank of England all got in common?
The answer is low rates and quantitative easing on a massive scale, and this year the (ECB) European Central Bank joined the party cutting rates into negative territory and announcing a €60bn a month bond purchase program.
The problem the ECB has got is they started their program way too late
and while the Federal Reserve and the Bank of England’s programs did initially act as a boost to domestic inflation the situation now is rather different.
For several years we’ve heard central bankers around the world claim that the dis-inflationary pressures in the global economy are transitory in nature, so I took the opportunity to look up the dictionary definition of “transitory.”
Transitory means, not permanent, brief, short, fleeting, you get the gist,
yet prices have been declining now for over four years, and that is hardly transitory, whatever ones definition of it.
I then decided to look at the overall trend of domestic and global inflation and here in the UK, CPI has been trending lower since its peaks of 5.1%
in September 2011, and has been below the Bank of England’s target of 2% since December 2013.
In Europe the trend is pretty similar, peaking at 3% in September 2011
and has been below the ECB’s 2% target since December 2012 and is now at -0.1%.
It’s a similar story in the US as well
yet we have the strange situation now that the Federal Reserve is looking to raise rates, while the ECB is looking to do even more in the way of interest rate cuts and bond buying
in an attempt to ignite inflationary pressures, within the European economy by driving the euro lower.
This decline in inflation indicates a trend and not transience
, which suggests that central bankers are in denial, and merely acting so as to be seen to be doing something, and are only acting due to a vacuum in fiscal policy.
The problem is whatever central banks do it won’t make much difference because everyone wants a weaker currency, and the problems they are all trying to tackle are ones of overcapacity and a slowing global economy.
This week we got the latest US CPI inflation numbers for October, and while these numbers didn't go negative they didn't show any distinct upturn in inflationary pressures either.
Despite this and with key benchmark commodity indices at 15 year lows the FOMC remains confident that inflation will soon return to its 2% target.
Is that transitory? I don’t think so, but it could be hopium, maybe we all need some of that.
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