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Bond Compass

PriceStats®: Inflation Progress Seems Sustainable

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.

8 min read

The global rally in risk assets at the end of 2023 was driven by the perceived willingness of central banks to start the normalization process.

In turn, the more persistent disinflationary trend that emerged in the fall gave credibility to the pivot. And while we have had false dawns in the inflation fight over the past year, moderating economic data and outright contracting growth in various countries suggest that slowing price gains are sustainable this time.

Developed and Emerging Market Inflation Diverge

Remaining vigilant in the inflation battle, central banks seem content to wait and see how data evolves. They also have not signaled the imminent start of rate cuts. From this perspective, recent PriceStats trends for both developed markets (DM) and emerging markets (EM) bear watching.

DM prices appear to be settling at levels still above targets, supporting a higher-for-longer policy, which many large central banks continue to espouse. In contrast, EM inflation is accelerating again, with food and fuel at least partially to blame for recent increases. Risk assets have moved together during the year-end rally, so any emerging divergence in inflation trends will affect these strongly correlated returns. 

US Inflation Close to Average

Goods deflation has been an important component in compressing US inflation toward Fed targets. The latest core CPI reading came in as expected, with a monthly reading of 0.3%. The largest contributor to recent inflation gains has been deflating core goods prices, which have posted six consecutive monthly declines.

The few remaining inflation hawks will cite ongoing concerns with services inflation, which is still at levels inconsistent with the Fed’s price stability goals. PriceStats has signaled deflationary goods trends for the past few months, with overall readings below longer-term monthly averages. The weaker prints at the start of the Q4 were worth watching as they may have signaled an earlier start to holiday discounting, which may prove temporary if overall consumer spending remained robust.

As 2023 ended, these same deflationary trends continued to make their way through the data, with PriceStats recording a -14 basis point (bps) decline for December, close to 10-year averages. Returning to averages is still a positive sign for the FOMC, although rate cut expectations may need a continuation of the below average levels we have seen over the past few months, particularly if services inflation shows continued stickiness.

Figure 2: US Inflation Finally Closes in On Average

Figure 2: US Inflation Finally Closes in On Average

BOJ’s Contrarian Approach to Inflation

The Bank of Japan (BOJ) has been the only major central bank to stay on the sidelines, maintaining a stimulative policy as the rest of the world embarked on the most aggressive tightening campaign in modern financial history.

At the crux of Japan’s contrarian approach has been its decades-long battle with deflation. As global inflation took hold, prices in Japan also trended higher, consistently printing above the 2% threshold for the first time in more than four decades. This encouraged the BOJ to take a baby step in removing stimulus by raising its yield curve control targets, but stopping short of raising policy rates.

Recent inflation trends may ultimately validate the BOJ’s patience, as PriceStats data for Japan have trended back down toward 2% over the past quarter. For a country that has long struggled with deflation, price stability around 2% would be one of the few positive accomplishments to emerge post-pandemic.

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