A kind of lost in translation continue is in progress between central banks and financial markets regarding inflation. Central bankers keep repeating that they want it higher. Markets fear it will get too high. Result: a perpetual yo-yo in long-term rates.
Apart from desires-objectives and fears, what is inflation like and how will it go? The numbers say it is clearly always low. Indeed, if we consider the three major economies of the world, namely the USA, China and the Eurozone, in October she even went down. In the USA the annual change in consumer prices fell from 1,4% to 1,2%; i China from 1,7% to 0,5%; in the Eurozone it remained stable at -0,3%.
Of course, to be more precise analytically we should glook at other indicators and other variationsshorter range. For example, in the USA the FED looks at the implicit price index of private consumption, in the less volatile version (therefore excluding energy and foodstuffs); and in the last four months these prices have increased between 0,2% and 0,3% conjunctural, which means around 2,5% annualized.
In 'EurozoneConversely, consumer prices, excluding fresh food and energy products, which is the indicator favored by the ECB, are at 0,4% on an annual basis, however down from 1,3% in July. In the last four months they have risen by 0,5%, which is just over 1% annualized.
Thus, on closer inspection, inflation appears to be less low. On the contrary, it would even look ok In the USA. Except that there rents matter a lot, and net of these (which are kept up by the ever-perpetuating trend of the real estate market: i house prices rise by about 6% per year) the annual speed must be reduced by half a percentage point.
In short, view in the rear view mirror of the past trend, inflation is below central bankers' wishes and certainly not yet enough to worry the markets and citizens.
It will be said, these data do not reflect the real situation in the context of the pandemic. In fact, transactions for some goods and services have almost disappeared or are abnormally low, so their recorded prices are of little significance. What happens if we adjusted the price indices to observe what matters most today in the basket of actual consumption? A very recent IMF study somewhat acrobatically says that inflation would be around two tenths of a point higher during the lockdown, when there was a massive reorganization of the shopping basket. And that would seem to prove investors right. But we always talk about decimals, not percentage points!
However, central bankers and markets live by trying to understand what will happen in the future. Here comes the difficult part. Because no one has the skills of the wizard Merlin. Common sense, however, is always an excellent compass. Starting from a solid principle: to have inflation it is not enough for prices to rise. A spiral must be triggered between all prices, including the cost of labor. And common sense says that this spiral can never start while there is lots of people around (better: locked up at home) looking for employment. We are, that is, in that context that Gianni Agnelli once summarized, replying to a journalist, with one of those memorable and biting lines of his, pronounced with a soft r: «Look, the problem is not the cost, but the workplace».
It will take years to bring employment back to pre-pandemic levels. And until then we will have to fear deflation more than inflation. Especially because of the enormous and ruthless ("Economie politique: Science sans entrailles", i.e. soulless, according to Gustave Flaubert) competition that new technologies they are unleashing against the old ways of producing and selling and what hundreds of millions of people they do to us who live in the small wealthy fraction of the planet.
Il pendulum of reason remains solidly on the side of central bankers. Investors object that only an inflationary wave will reduce the burden of the mountain of public debt which is piling up everywhere. But one thing is the goal and the desire of governments to trigger the inflation tax, another against being able to impose it. And this hiatus, or diaphragm as Keynes would have called it, assures us that low inflation will remain with us for many years to come.
Sign of misery, not of abundance. Markets should equip themselves with a better dictionary, if they don't want to continue to make mistakes in the translation.
