Inflation in the Group of 20 largest economies fell to its lowest level in almost eight years in June, deepening a puzzle confronting central banks as they contemplate removing post-crisis stimulus measures.
The Organization for Economic Cooperation and Development said Thursday that consumer prices across the G-20--the countries that accounts for most of the world's economic activity--were 2% higher than a year earlier. The last time inflation was lower was in October 2009, when it stood at 1.7%, as the world started to emerge from the sharp economic downturn that followed the global financial crisis.
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The contrast between then and now highlights the mystery facing central bankers in developed economies as they attempt to raise inflation to their targets, which they have persistently undershot in recent years.
According to central bankers, inflation is generated by the gap between the demand for goods and services and the economy's ability to supply them. As the economy grows and demand strengthens, that output gap should narrow and prices should rise.
Right now, the reverse appears to be happening. Across the G-20, economic growth firmed in the final three months of 2016 and stayed at that faster pace in the first three months of 2017.
Growth figures for the second quarter are incomplete, but those available for the U.S., the eurozone and China don't point to a slowdown. Indeed, Capital Economics estimates that on an annualized basis, global economic growth picked up to 3.7% in the three months to June from 3.2% in the first quarter.
That is a very different situation from the one confronted when inflation was last lower than it is now. Back in 2009, output gaps had widened sharply as demand collapsed in the wake of the financial crisis and central banks were desperately adding to their stimulus measures to avoid a slide into deflation.
This year's decline in inflation rates comes as some leading central banks have begun to contemplate a withdrawal of those stimulus policies.
In July, European Central Bank President Mario Draghi said the bank would decide in the fall on the future of its bond-buying program, which is tentatively scheduled to end in December. ECB watchers expect the program to be extended into 2018, but at a reduced scale. Most doubt the purchases will continue into 2019.
That followed the Bank of Canada's mid-July decision to raise its key interest rate for the first time in seven years, while the U.S. Federal Reserve has raised its main rate four times since the end of 2015 and may do so again.
However, some Fed officials have expressed concern in recent weeks about pushing ahead with rate increases in light of softening inflation data.
"Despite further falls in unemployment across a number of countries, wage growth and global inflation remain relatively subdued," the Bank of England said in its latest economic outlook report, published Thursday.
The bank joined its peers at the ECB and the Fed in signaling it would likely raise its key interest rate in the coming years. However, the U.K. is in the unusual position of having inflation that is above its central bank's 2% target. This is due to the pound's large depreciation since the June 2016 vote to leave the European Union, which has raised prices of imported goods and services.
Also Thursday, the Czech central bank raised its key policy rate for the first time in nearly a decade, a milestone for Europe's central banks that have taken dramatic easing steps to prop up their economies and keep their currencies from strengthening too much.
Some central banks in large developing economies are moving in the opposite direction and cutting rates. The latest to do so was the Reserve Bank of India, which Wednesday lowered its repurchase rate by 0.25 percentage point to 6.0%, having previously cut in October 2016. Consumer-price inflation in Asia's third-largest economy slowed in June to well below the 2% bottom of the central bank's target range.
While global economic growth appears to be picking up in 2017 after a disappointing 2016, one ingredient for a sustained pickup in inflation is still missing: an acceleration in wages.
Central bankers in developed economies are puzzled by the sluggish pace of pay rises, given continuing declines in jobless rates. However, they believe that economic growth will ultimately eliminate the gap between what their economies can produce and what they are now producing, supporting wages and prices.
Write to Paul Hannon at email@example.com
(END) Dow Jones Newswires
August 03, 2017 10:17 ET (14:17 GMT)