Inflation expectations have started to creep up again with the developments in the months ahead looking to stabilize them. From business surveys to hard economic data, all economic indicators from the large economies point in that direction. This covers countries such as the US, the UK and Japan. Some analysts have pointed out that even as household inflation expectations are edging higher, broad price pressures seem to be leveling off.
In the US, inflation expectations among households peaked at 6.7% YoY in April—their highest peak since 1981. Long-term expectations remain near 4.5%, the highest level recorded since 1991. Most recent data indicates that we’ve plateaued with the producer price index at around 4 percent starting from the new year. This stability exists despite the recent bumps. Inflation outlook The supply side price pressure indicator is still pointing downward, indicating that inflation should not spike significantly in the coming months.
Household inflation expectations in the UK have begun to moderate. According to the most recent numbers, inflation is 2.6% in March, down from 3.0% in January. The drop can be attributed to a combination of causes. Specifically, the plummeting gas and oil prices have done some of the heavy lifting in lowering inflation across the board.
Internationally, too, we see a muddled inflation picture. Take, for instance, Japan, where core inflation is slowing, now at 3.4% down from 3.7% in January. This is just one example of a larger trend towards more stabilizing prices as consumer sentiment swings. By March, Hong Kong’s CPI inflation had eased to 2.4%. This deceleration is largely due to a drop in energy costs, as well as lower rent and car insurance prices.
Meanwhile, households’ inflation expectations have risen just a notch over the coming year. This reflects a balancing act of consumers remaining risk-averse, but encouraged by their beliefs regarding improving economic conditions ahead. Average hourly earnings, excluding overtime pay and bonuses, have made only modest overall gains. Unfortunately, this growth has largely been swallowed by inflationary pressures.
In Australia, the consumption deflator was unchanged at 2.5% in February. This smoothness only adds to the downward story across the board of inflation stabilization nationally, state, and even at the metro level. Economists are quick to stress that expectations can change in the short term, but that long-term outlook does seem much more solid.
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As market participants continue to digest these developments, it is important to pay attention to how various sectors of the economy react to these mixed economic signals. Countries can’t afford to send such mixed signals when it comes to global inflation dynamics. Such an extraordinary situation clearly calls for highly adaptive and flexible monetary policy measures.