Core inflation in advanced economies likely to rise gradually as labor markets become tighter, says ANZ Research

Core inflation in the advanced economies to rise gradually as labor markets become tighter, led first by the United States where the labor market appears to be close to fully employed.

There is little evidence of a broader-based pick up in pricing pressures. Somewhat surprisingly there was a moderation in core inflation in advanced economies in March. In the U.S., the core CPI fell by 0.1 percent m/m, which was the first monthly decline since early 2010. In the euro area, core inflation came in at just 0.7 percent y/y, the slowest pace in nearly a year and not far from the cyclical low of 0.6 percent.

Market-based measures of inflation expectations continue to ease in 2017 after rising sharply for much of 2016. This is contributing to a rally in global bonds. Lower inflation expectations are in part, reflecting a reassessment of the global/US reflation story.

Further, hopes of a sizable US fiscal stimulus have been either dented or deferred owing to an absence of specifics from the Trump administration and/or a realization that having a Republican-controlled Congress does not mean plain sailing.

"ANZ’s commodity price forecasts suggest that the pickup in Chinese producer prices has peaked. This, of course, will have important knock on effects for globally traded prices and global inflation," ANZ Research commented in its latest report.