Goldman Sachs says global reflation is ‘an illusion’

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Speculation that consumer prices are finally rebounding globally ignores the reality of low underlying inflation in the eurozone and Japan, and as a result, a reduction in European Central Bank asset purchase or a increase in the Bank of Japan’s 10-year yield target is unlikely this year, according to economists at Goldman Sachs .

The Goldmans team, led by Robin Brooks, said in a note that rather than global reflation, they see increased central bank policy divergence across the largest economies, which will only drive the US dollar stronger.

This chart, from Goldman Sachs, clearly shows that while headline inflation in eurozone will trend higher in the first two months of 2017 due to the so-called base effect — the contribution of out-sized price swings — underlying inflation continues to remain low. A short-lived bounce in food and energy prices also conspired to lift the December headline number in the trading bloc, they said.


Inflation-targeting central banks typically focus on core or underlying inflation, which eliminates products like energy and food that can have temporary price shocks.

Large amounts of labour market slack, alongside minimal structural reform in the eurozone, plus entrenched low inflation expectations in Japan all mean what’s really happening is a strengthening of the divergence, Goldmans said.

“While eurozone core inflation needs to double to meet the ECB’s 2017 forecast, the multiple is many times that in Japan, where the 2017 forecast of 1.5% requires a very large pick-up in month-over-month momentum of core CPI,” they said.


The European central bank targets a 1.1% core inflation level, which in itself is subject to “downside risk”, Goldman warns.