UK deflation – the big picture: worldwide oversupply of goods and services is causing global disinflation

12/02/2015

MONOGRAM

  • Core inflation is almost universally trending down, a trend upon which quantitative easing has had no effect
  • Likely UK deflation would admit it to 67% of global countries with an annual inflation rate of close to, or below, zero
  • Despite inflated asset prices interest rate rises or monetary tightening are unlikely

London, 12 February 2015. Paul Marson, Chief Investment Officer of Monogram, comments on Mark Carney’s open letter to the Chancellor, George Osborne:

Mark’s Carney’s statement that inflation is likely to fall should not come as a surprise given the current global trend. At the end of 2014, 80% of the 35 countries from the OECD database had inflation trending down over the prior three months, and 34% had an annual inflation rate below zero. Although asset prices are inflating, due to monetary policy, the global market in goods and services is experiencing deflation. We are currently seeing broad-based and pervasive disinflation due to an oversupply of goods and services, as well as in the energy industry; the UK is certainly not unique amongst this worldwide trend of structural global disinflation.

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There is no logic in raising interest rates in this environment unless, of course, central banks want to pull asset prices down. Global disinflation has prompted a worldwide trend of lowering official interest rates, with almost 60% of Central Banks cutting their official rates in the past six months, compared with 10% that have raised them.

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The UK’s inflation must be seen in the context of this structural global disinflation; 60% of the 30 leading economies show core inflation falling in the past six months, with a further 50% facing core inflation of less than 1%. The source of this structural disinflation is China, whose overinvestment and oversupply is exporting deflation globally. The situation is being exacerbated by quantitative easing, which is creating further investment (and capacity hasn’t been destroyed).

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Mark Carney has suggested easing monetary policy to return inflation to 2% if core deflation persists. However, quantitative easing does not have any effect on core inflation, which is now lower than when QE was first utilised. It is unlikely to ward of deflation, as the combination of low global growth, structural oversupply and low interest rates, is causing structural disinflation globally.  This can not be fixed by waving the “magic” wand of further QE.

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