Persistently low inflation has been one of the main themes on global markets in 2017, but signs are emerging of upward pressure on prices in 2018.
That’s one of the insights drawn from research on global inflation by ANZ economists Tom Kenny and Kanika Bhatnagar.
The pair cited increased potential for a pickup in wage growth and signs of further capital expenditure as two areas to monitor in the near-term inflation outlook.
Their report just covers the world’s G7 economies — the US, UK, Canada, France, Germany, Italy and Japan — and it remains to be seen whether similar inflationary forces becomes prevalent in the Australian economy.
For one thing, domestic wage growth is stuck at record lows and the latest reading on November 15 again missed expectations — a result which saw the Australian dollar fall below US76 cents for the first time in four months.
In a similar way to other developed economies, Australia has experienced a disconnect as wage growth remains stagnant despite a consistent rise in overall jobs growth and low unemployment.
Part of that has to do with extra slack in the labour market, a measure of those who are in work but would like be working more hours. But among the G7 economies, Kenny and Bhatnagar said that may be about to change.
“Labour utilisation in G7 economies is nearing full employment levels and should soon put upward pressure on wage growth,” the pair said.
Wage growth is seen as a key driver of inflation, given that workers who earn more are more likely to increase discretionary spending.
Adding to the prospect of increasing tightness in global labour markets, the two analysts cited notable changes in the Beveridge Curve for G7 economies.
The Beveridge Curve plots the relationship between the unemployment rate and the number of listed job vacancies. A low unemployment rate combined with high job vacancies indicates that an economy is expanding.
“The Curve suggests that labour markets in advanced economies have tightened considerably in recent quarters,” Kenny and Bhatnagar said.
Based on those leading indicators, the figures suggest that global developed markets may finally see a shift in whats been a conundrum for the world’s central banks — that despite low unemployment and steady economic growth, wage growth has remained stagnant.
The pair noted that the US Federal Reserve alluded to the problem in the minutes from its November meeting, citing a trend among US employers of providing more job flexibility and training rather than raising wages.
“However, wage pressures are reportedly building in some districts and certain industries,” they said.
Canada’s central bank Governor Stephen Poloz also discussed the problem in a recent speech, referring to the impact of changing demographics as younger employees replace retiring workers on higher salaries.
On the investment side, the analysts said the United States, Japan and Germany are well-placed for a pickup in capital expenditure.
“A forward looking indicator of investment spending, which we constructed across the G3, is pointing to a reasonable expansion over the next couple of years. This should, in turn, drive up global core inflation,” they said.
They also highlighted a broadly positive global growth backdrop, which is helping to underpin support for commodity prices and increased production.
That points to continued momentum in ANZ’s Upstream Price Index, which historically has correlated closely with global CPI growth.
“The index is pointing to a pickup in headline CPI over the next six months,” the analysts said.
Based on those indicators, there’s a possibility that global inflation growth will pick up in advance of Australian CPI.
In fact, as part of the RBA’s quarterly Statement on Monetary Policy on November 10, Australia’s central bank downgraded its inflation forecasts for next year by 0.25%.
But even if Australia does lag other developed markets, any pickup in global inflation next year is likely to have an impact across multiple asset classes, given the close relationship between inflation growth and the outlook for interest rates.
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