Global war on inflation sees progress

Socio-Economic Research Centre economist and executive director Lee Heng Guie.

THE fight against inflation appears to be bearing fruit in some parts the world.

There are some data points and comments coming from central banks around the world which point to the direction that inflation globally appears to be brought under some semblance of control following price flares that were seen one to two years ago.

These had led to central banks such as the US Federal Reserve (Fed) and the European Central Bank (ECB) rising interest rates then.

But according to economists surveyed, the inflationary data at this juncture also tells that it may still be too premature for central banks to release pressure on the brakes since it risks inflation rising again.

As such, it may take more time before monetary authorities make any steps towards any interest rate cut in the near to medium term.

A recent comment by ECB president Christine Lagarde in the week sums up the present sentiment on this front as she describes the ECB’s journey towards achieving the 2% inflation target as a complex one.

Eurozone inflation eased to 2.5% in June, although individual countries such as Belgium saw the gauge at 3.7%, which was the highest in the eurozone, while Latvia logged the lowest inflation rate at 0.1%.

The ECB cautioned that anticipated rate cuts will not necessarily follow a linear predictable path but rather be more data-driven as core inflation and services inflation still remains on the high side.

“Globally, inflation is easing but prices are still high due to core and services inflation. This is why central banks are waiting for more information or more confirmation from the data before moving to cut rates.

“For the first time you can see the Fed not taking the lead – we have had recently seen the Bank of England and the ECB anticipated to cut ahead of the curve,” veteran economist and Socio-Economic Research Centre executive director Lee Heng Guie tells StarBizWeek.

Socio-Economic Research Centre economist and executive director Lee Heng Guie.

Bloomberg Economics’ Inflation Dashboard data show there has been more progress on inflation in the United States in recent days, given that there are signs of a resumption in the disinflationary trend key areas.

Inflation expectations are expected to be kept in check along with a cooling labour market moving forward in the United States, it notes.

Earlier in the week, the heads of the ECB and Fed indicated in a forum they are eyeing interest-rate reductions in the second half of the year, although they remain concerned about high inflation, Bloomberg reports.

The inflation rate in the United States rose by 3.3% on a year-on-year basis in May. The next release of the US consumer price index data is on July 11.

“The concern is that if they hold rates (higher) for too long the economy could be impacted – so this is why they are moving ahead of the curve.

“There are also concerns that if Donald Trump comes back as president in November, inflation risks may be on the upside on any additional import tariffs imposed on China, and an expected stimulus on economy which may pressure inflation upwards,” Lee says.

OCBC Bank senior Asean economist Lavanya Venkateswaran agrees that the preemptive actions by central banks are slowly but surely being seen with the more controlled inflation rate seen around the world today.

“The ECB has cut rates and the Bank of Canada as well. It’s a dyssynchronous process and it looks like everyone is waiting for the Fed to start cutting rates.

“The US data seem to have turned for the better based on recent numbers. It would be safe to say that global central banks are seeing disinflation, the process is bumpy – but it is getting there,” Lavanya tells StarBizWeek.

Meanwhile, Malaysia logged the fourth lowest in Asia for inflation rate at 2% for the month of May.

For the same month, China saw the lowest inflation rate at 0.3% in Asia, followed by Thailand at 0.6% and Hong Kong in third place at 1.2%.

Singapore’s core inflation rate was at 3.1% in May while Indonesia’s inflation rate was 2.5% in June, based on latest reported figures at the time of writing.

“Asean economies appear to be waiting for the US Fed to cut rates so that some economies in the region can do rate cuts. We see Bangko Sentral ng Pilipinas and Bank Indonesia cutting rates this year – only these two are expected to do so in Asean. This is contingent on the Fed cutting rates first,” Lavanya says.

Commenting on the low inflation rate in China, Lee says there was negative core deflation before this.

“Now there is some inflation, it is very small but the story there is that the demand recovery is still very slow and many sectors are at overcapacity levels. And this is why producer prices became negative.

“This is a different type of concern that the economy is not picking up fast enough. Ideally, there should be a bit of inflation in the economy, it cannot be zero,” Lee says.