Weekly: Watch out, inflation has bottomed

Amid flattening yield curves, recession worries, negative policy rates, and geopolitical tensions, the trough in global inflation dynamic has been largely ignored. Is such complacency justified?
Taimur Baig, Chang Wei Liang18 Oct 2019
  • Amid numerous worries, the trough in global inflation has been ignored. Is this justified?
  • Globally, food and metals have clearly bottomed. Energy prices are about to join the fray
  • Inflation is unlikely to spike in 2020, but won’t be a support for further decline in rates
  • Resultant curve steepening may cause wider spreads, but helps in diffusing deflation fears
Photo credit: AFP Photo

Inflation is benign, but not declining any longer

There are many things on investors’ minds these days, but inflation is not one of them. At a time when global growth is slowing, geopolitical tensions are causing risk aversion to rise, supply side pressure is not apparent. Inflation expectations are low, neither central banks nor financial market participants are showing any worries about the inflation outlook, as seen by the monetary policy stance and behaviour of interest rates worldwide.

But is such complacency warranted, when one looks at the inflation data from both developed and developing markets? First, tracking US and Eurozone inflation outturn of recent years, headline inflation is seen to have rebounded decisively from 2015 onward, and has only dipped marginally this year. More strikingly, core inflation appears low but on a clear uptrend in both economies.

Second, in Asia, looking at China, India, Indonesia, and Singapore, four bellwether economies, signs are clear that inflation is low but bottoming. Helped by constructive monetary policy stance, no major fiscal slippage, muted demand, and benign food and energy prices, these economies have experienced a prolonged bout of mild inflation since 2015. But looking ahead, we are doubtful that further disinflation is likely. If anything, base effect dynamic suggest that inflation has bottomed out in the region.

Ignoring domestic idiosyncratic factors like pork price in China and onion price in India, we consider the global commodity price dynamic along a range of important items. Across rice, soybean, as well as base and precious metals, there are no major technical or fundamental reasons for further disinflation. Energy price inflation is also on course to bottom out in the coming months. Unless demand from China undergoes a major downturn, we think that the weakest phase of inflation is behind us. This could also cause rates to bottom, curves to steepen, and spreads to widen. Watch out.

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Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Chang Wei Liang

Credit & FX Strategist

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