Is it time for disinflation? The extraordinary rise in prices has scorched the economies of half the world for part of 2021 and 2022. In this period there were moments of great tension and uncertainty, since, despite the optimistic forecasts of the central bank, inflation did not stop rise in monthly and annual terms, driven by different energy shocks, problems in the supply chain, the scarcity of some inputs or the lack of labor (labor costs). Now, the situation could be changing. , everything indicates that the inflationary tide could have started to recede.
Beyond Canada and Canada, various leading indicators reveal (imported prices, producer prices, oil…) that the global economy will enter a new phase that could be known as the great disinflation. However, there will be large geographical differences within this new environment, with economies much better positioned than others to ‘enjoy’ the cooling of prices.
This does not mean that inflation will disappear. it just assumes that prices will rise at a more restrained pace than has been seen in recent months. It is likely that the CPI will still take months or years to return to the 2% area targeted by the central banks of developed countries. However, the 9-10% inflation rates seen in recent months could soon be a thing of the past.
Just as the US was the first country to experience the inflation shock, it could also be the first to show the clearest signs of this new stage of disinflation. Disinflation is a term that is rarely used, but one that has been talked about on more occasions. to explain how the different types of disinflation work.
The Great Disinflation?
Troy Ludtka, Natixis economist, already warned of this scenario a few weeks ago. This expert published a report with fifteen pages full of graphs and titled ‘The Great Disinflation?’. Among the graphs it was possible to appreciate the strong increase that inventories have suffered in recent months, the decrease in the real disposable income of households (loss of consumer purchasing power), All these indicators are consistent with a significant reduction in the global inflationary pressure.
A few days later, JP Morgan economists have published a report delving into this movement. These experts point out that world inflation has grown at an annual rate of 9.7% in the first half of the year, this has been relevant due to its breadth in all regions and in all components. But now the tide may be turning: “Inflation Reports for July Last month saw a 0.3% m/m rise in global CPI, thanks to weakening pressures on commodity and commodity prices, something that is likely to persist.”
We expect this downward shift to drop global inflation in the second half of 2022 below 5%. Although it is true that this means a reduction in the rate of growth of prices in half, the CPI is still growing at more than twice as fast as before the pandemic.
an uneven impact
This disinflation will come unevenly and generate a divergent monetary policy response, according to JP Morgan. “We forecast that the greatest disinflationary momentum will occur in the US, where the CPI will fall to 3% in the last semester, thanks to the greater impact from the decline in raw materials and the easing of restrictions in the global supply chain, and the fall of wholesale gasoline prices.
On the other hand, emerging economies should also enjoy significant disinflation, partly due to a substantial moderation in food price inflation. Although all regions should contribute to this decline, “we anticipate that the EC-4 (Czech Republic, Hungary, Poland and Romania) will end the year at the top of the global inflation league table with average CPIs above 13%.” in the second semester”, predict the analysts of JP Morgan. Two key forces keeping EC-4 inflation higher – rising natural gas prices and depreciating euro – should also limit any easing in Western Europe, where JP Morgan expects CPI to average 7.7% a year. .
JP Morgan experts believe that the slowdown in inflation will be based on two recent factors. First, the rapid rise in energy commodities, which were a key driver of this phenomenon, has begun to reverse. Crude oil prices are down 20% from their peak and FAO food prices are down 11% during June and July. “Our models point to a sharp slowdown in global food inflation to 6% a year in the fourth quarter of 2022 from rising to 14.5% in the last quarter.” On the other hand, these experts expect the CPI for energy to stabilize in the coming quarters.
The euro zone will suffer from high inflation for longer
“Second, in addition to moderating price power for finished goods, global supply chain constraints have eased. With delivery times shrinking and shipping costs falling, goods inflation is likely to durable products will be reduced to half the current rate,” the JP Morgan report states.
The US will move from the bottom of the inflation ranking. Having been the epicenter of this phenomenon that has taken shape in 2021, “it is now set to see the fastest disinflation among the major economies.” The fall in crude oil prices should have a particularly large impact on the US CPI.
On the other hand, the US dollar is up about 10% in weighted terms against the other major trading pairs, a development that already appears to be turning the tide for import prices. Finally, inflation in the US has been driven by a sharp increase in car prices in the last 18 months. Now, the price of the vehicles seems to have frozen.
Europe will continue to suffer
On the other hand, inflation in Europe will remain relatively high, very close to 8%. “While we expect US inflation to fall sharply, while crude and refined oil products (US gasoline) and farm commodity prices are down 15%-20% from their June levels, European gas prices (TTF) have risen 143% over the same period,” explain the authors of the JP Morgan report.
Some of the natural gas price increases have yet to be passed through to retail utility prices, and the reduction in Russian natural gas supply will persist for a notable time. For all these reasons, “European inflation will remain high for some time, very high. In fact, at the same time that we expect the energy CPI in the US to fall by approximately 25% year-on-year in the next three months to September, we expect the energy CPI for the euro zone to increase by approximately 15%”, the analysts of the American bank conclude.
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