They’re the four most dangerous words in economics: This time it’s different.
Yet, that’s exactly what many are indeed saying about the apparent death of inflation around the globe.
From Tokyo to Washington to Brussels, upward price pressures are few and far between. Odd, considering the powerful tsunamis of liquidity the Bank of Japan, Federal Reserve, European Central Bank and others churned into markets since the 2008 global crisis. Odder still that the lowest unemployment in Japan in 26 years – and the lowest in the US in nearly 50 – isn’t fueling wage-push cost pressures.
The disconnect made the April 17 cover of Bloomberg Businessweek, which asked: “Did Capitalism Kill Inflation?” Perhaps it did, considering the generalized disinflation showing up around Asia. If so, it’s both good news and bad for Asia.
In Malaysia, for example, annualized inflation is seeing its first declines since 2009 — now under 2%. In the Philippines, home to Asia’s worst inflation surge in 2018, consumer price gains are seen sliding below 3% in April.
South Korean inflation is near a three-year low, while Indonesia’s is below 2.5%. China’s consumer price index rose just 2.3% in March from a year ago. Producer costs only rose 0.4%. Prices in India are advancing at a sub-3% rate.
Japan is barely halfway to its 2% inflation target. And in the US, consumers rose just 1.9% in March. These remarkable trends are stellar news for Asia’s central banks, many of which spent 2018 hiking rates. The tightening was aimed partly at capping prices, partly at stabilizing currencies.
It means monetary policy can become more accommodative as the US-China trade war hits exports. Economists from Adam Smith to Milton Friedman also long preached the gospel of price stability. It’s a necessary ingredient for healthy growth and confidence among businesspeople and consumers to invest and spend.
Weak global demand
Since the 1997 Asian crisis, that’s precisely the underpinning regional policymakers have been seeking. Yet the emergence of a stable-price environment comes with as many cons as pros. The biggest con: what it says about the weak state of global demand.
“Nobody is worried about inflation, and no one thinks central banks will raise rates any time soon,” says Louis Gave of Gavekal Research. “Instead, markets are indicating we are back in Goldilocks territory. So far this year, big equity markets are up by 10-20%, while long bonds in every major market have delivered positive returns. Behind these conditions lies a simple reality: In the last quarter of 2018, inflation expectations collapsed, giving the world’s central banks room to turn dovish.”
Yet the why is a concern for Asia. This dynamic reflects the tepidness of the globe’s post-Lehman-crisis snapback. Massive quantitative easing in the US, Japan and Europe revived growth, but the fuel it provided wasn’t enough to make incomes whole again. What’s more, governments generally left it to central banks to stimulate demand. As such, supply-side upgrades to increases in competitiveness and productivity were few and far between.
That complacency is coming back to haunt Asia. The last 12 months of trade warring caught all too many governments naked, in the Warren Buffett sense. It’s only when the tide goes out, as the Sage of Omaha says, that you realize who’s been skinny dipping. Make that much of Asia as US President Donald Trump’s tariffs slam supply chains.
Yet complacency works both ways, including on the part of investors assuming that things aren’t different this time.
When that earlier-mentioned Bloomberg Businessweek cover ran, the chatter was the disconnect, as some buzzed about the “magazine-cover curse” — and about inflation suddenly returning and shocking global markets.
Analysts at Zero Hedge spoke for many when they said: “The huge complacency about the risk of inflation today is a classic contrarian signal and strongly suggests that inflation, stagflation (and in a worst-case scenario hyperinflation) will rear its ugly head in the coming months.”
To understand why Bloomberg Businessweek may be right, though, consider Japan’s 20-year bout with deflation. Since 1999, the BOJ has held interest rates at zero, and oftentimes much lower. Even though growth returned and Prime Minister Shinzo Abe launched a series of reforms in 2012, wages have largely walked in place. Inflation, too.
Because Japan relied on monetary stimulus over structural reforms, companies lack the courage to fatten paychecks to kick off a virtuous reflation cycle. That same pattern is playing out in the US. Neither aggressive Fed easing nor a $1.5 trillion tax cut is enriching the masses. Both Japan and the US are proving again that “trickle-down” economics doesn’t work.
All this augurs poorly for Asia’s ability to harness global growth and restore normal pricing power. And it’s a sign that today’s synchronized global recovery, a rare event, is working differently than past ones as inflation goes scarce.