Underneath the bonnet of “sticky” global inflation

I will be speaking on the “Fixed Income and FX” panel at the (virtual) Global Independent Research Conference on 13th October at 12.30 (UK time). Click here for further details.

Our measures of global headline and core CPI-inflation — weighted averages of inflation in 32 major developed and Emerging Market (EM) economies which account for over 90% of world GDP — between May 2020 and August 2021 rose respectively 2.4pp and 1.3pp to 3.5% yoy (decade high) and 2.8% yoy (13-year high). Global food price has risen over 40%.

Moreover partial data suggest that global CPI-inflation rose yet further in September.

Headline and core CPI-inflation have risen more rapidly in developed economies than in EM economies, in large part because of increase in US and Eurozone but subdued inflation in China. Whereas inflation (particularly headline) in developed economies is well above its pre-pandemic averages, EM inflation is broadly in line with 2015–2019 averages.

By historical standards inflation is theoretically a greater problem in developed economies than in EM. But this would ignore the more pernicious impact on households and businesses in poorer EM economies where governments have little fiscal firepower.

From this there are five key themes which we will analyse in forthcoming FIRMS reports:

1. Relative weights, past and future, of supply-side vs demand pull-inflation.

2. Whether global elevated CPI-inflation will ultimately prove “transitory” or “sticky”.

3. Whether/at what pace central banks will further tighten monetary. Global central bank policy rate stands at 1.53%, up only 22bp since record-low 1.31% in August 2020. As was the case following 2008 Financial Crisis EM central banks have led the way.

4. The impact of tighter central bank monetary policy on domestic and global CPI-inflation and already modest economic growth.

5. The overall implications for FX and interest rate markets, both in terms of directionality and volatility.

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