Are inflation fears a risk to growth?

Inflation fears are back. Dormant for well over a decade, prices again seem to be on the rise. Past episodes of inflation have done everything from aggravating analysts, politicians and the general public to inciting full-blown panic at times when the beast was out of control. These moments are etched on our collective memory, and we seem to have instant recall when there’s a whiff of inflation in the air. We can now sniff the scent again, and the fearmongers are stirring things up. Do they have a point, or are today’s jitters premature?

Is inflation back?

What are the numbers saying? In the US economy, the most visible measure is the consumer price index (CPI). On a year-to-year basis, the CPI has been creeping up, and is now above the Fed’s target mid-point at 2.9 per cent. Core inflation – the measure that strips out the more volatile food and energy sectors – is more tame at 2.2 per cent, but still above that sensitive mid-point, and has also risen sharply in the past four months.

Western Europe is also seeing upward movement. All-items CPI across the region jumped to the 2 per cent level recently after drifting around the 1.5 per cent level for a year or so. Measures of core inflation are still well contained, but the movement has grabbed the attention of the more inflation-averse Europeans.

Central banks in both economic areas have been responding. The Fed’s rate-tightening program is now into its 30th month. Europe is the laggard here, but the ECB has signalled the wind-up of its quantitative easing program by year end, with rate hikes now forecast for mid-2019. These moves are intended to accommodate the recent up-shift in growth, gently nudging the economy to keep prices at bay. The worrywarts aren’t convinced. They fear central banks are behind the curve...

This has been excerpted from a 19 July 2018 article written by Peter Hall, EDC Vice-President and Chief Economist.