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Bond Compass

PriceStats®: What Happens After Peak Inflation?

A look at quarterly measures of inflation, based on prices of millions of items sold by online retailers, to help investors anticipate and evaluate the impact of inflation.

Q3 2023

Inflation Begins to Look Normal

Inflation has been on a steady rise for the past two years. And while PriceStats and official data showed that most economies reached peak inflation near the end of last year, price disinflation has been a slow and arduous process.

Driven by strong labor markets and continued consumer demand, sticky inflation caused central banks to maintain their tightening biases over the past few months, with a few implementing another round of surprise rate hikes.

But our PriceStats data shows that online prices started to disinflate in June, with a few economies showing outright deflation. While one month doesn’t make a trend, central banks will be encouraged if online prices translate into their official inflation readings.

The U.K. and Canada have the lowest monthly inflation readings, while monthly eurozone price gains at 0.15% are less than half what they were at the end of May, as shown in the chart below. It’s notable that among the G-10, US prices trended higher in June while Japanese prices are proving stickier, but also more stable, at levels above Bank of Japan (BOJ) targets.

Possible Relief in U.K. Inflation

There has been limited good news for the U.K. on the inflation front, which at the official level remains the highest among developed economies. Even the expected disinflation from frighteningly high levels (UK CPI @ 8.7% YoY) failed to materialize in May’s official readings, prompting the Bank of England (BOE) to surprise markets with a 50 bps hike in June, after throttling down toward the 25 basis points (bps) range since the spring.

Investors think there is another 125 bps in hikes on tap; that would take the policy rate to 6.25%. Given that the U.K. consumer is increasingly stressed, the need for such a high rate increasingly points to an economy that will fall into stagflation.

Recent PriceStats data shows that the economy may be in for some much-needed inflation relief. Overall, U.K. prices have trended substantially below season averages for most of June, led by lower transport prices, but also lower household goods costs.

Three-month annualized data has recently fallen near the BOE’s 2% inflation target, which may be enough to pull overall official readings into a 7% YoY range, as shown in the chart below. Given that the market has taken an aggressive upside approach to UK inflation dynamics, any downside surprise could be market moving.

Inflation Path for Japan Still Unclear

The BOJ remains an outlier among the many circling monetary hawks that have taken flight over the past year. Other than tweaking the range applied to its yield curve control program late last year, the BOJ has remained steadfast in its view that it needs to see further signs that it has sustainably reached its inflation goals before withdrawing its vast stimulus programs.

So even as official CPI data hit the highest reading in over three decades, there are no signs of an impending BOJ policy shift.

Our PriceStats data for Japan provides mixed views on this approach, with online inflation generally having stayed above 2% for well over a year. Moreover, PriceStats shows that inflation in Japan has generally been stable since the start of the year, with limited signs that the deflationary impulse the BOJ fears most will return.

With BOJ ownership of the Japanese government bond market at all-time highs, we suspect that there is an incentive to ease up on its stimulus. That may get a nudge from the continued stability of online prices, which dispels deflationary concerns.

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