To be fair, there won’t likely be an identifiable all-clear moment for inflation — no definitive inflection point policymakers can point to as the month when price pressure began to durably abate across the developed world.
Even if we assume inflation won’t become vexingly stochastic going forward, an eventual deceleration in price growth will surely be frustratingly uneven, and it might not be clear until after the fact when inflation was on a “sustainable” path lower, to paraphrase policymakers. And then there’s “long and variable lags.” Just as this year’s tightening might’ve already delivered a latent recession in developed markets, the impact of rate hikes on inflation won’t be known until mid-2023 at the earliest.
Finally, much is beyond central banks’ control. The economic war between the US and China is intensifying, Russia’s Ukraine misadventures have likely changed the macro landscape forever and the pandemic dealt a serious blow to many key disinflationary enablers.
All of that said, the optics around the subtle, unfolding pivot from central banks this month were challenging, to put it politely. To briefly recap, the RBA downshifted to a 25bps increment, the Bank of Canada (under political duress, by the way) surprised with a smaller-than-expected hike and the ECB dropped key hawkish language from the October policy statement. Mid-month, the rumor mill was alive with speculation that the Fed might attempt to convey a step-down to 50bps increments following an assumed 75bps at the November meeting.
Oh, and Haruhiko Kuroda is almost a caricature of himself by now. On Friday, following the Bank of Japan’s October gathering, he insisted on the necessity of “firmly supporting” the Japanese economy with more easing, said he doesn’t expect to hike rates or exit accommodation “anytime soon,” boosted bond purchases mid-quarter for the first time ever and, in case it wasn’t clear enough, emphasized that he’s “not thinking at all” of abandoning policies aimed at spurring inflation.
With all of that in mind, consider the figure (below), which shows inflation outcomes across major economies.
Let me emphasize: There isn’t a single good outcome there. In the US, core price growth is accelerating. In Canada, September’s headline print (6.9%) was off the highs, but ahead of estimates. In Australia, the 7.3% headline price growth observed in Q3 was the hottest reading since 1990. In Germany, October’s 11.6% print on the harmonized gauge was off the charts (it was well ahead of every estimate). October data for the eurozone is due next week, but September’s print was another record and marked the fifth consecutive month that consumer price growth exceeded economists’ forecasts. In Japan, inflation is 3% for the first time in decades (excluding the tax impact eight years ago) and on Friday, Tokyo said inflation hit the highest since 1989 this month.
All of that happened concurrent with the unfolding deescalation from central banks. The optics aren’t great. Policymakers are downshifting just as inflation is accelerating or reaccelerating, depending on the economy.
In Japan’s case, the situation borders on the slapstick. Now, in addition to Kuroda’s steadfast refusal to even consider adjusting monetary policy in the face of three-decade high inflation, Fumio Kishida is pushing a JPY29 trillion stimulus package aimed at reducing inflation (note the italics). Kuroda’s contention that yield-curve control doesn’t cause a weaker yen, is (forgive me) laughable. There may be circumstances under which it wouldn’t cause a weaker currency, but when US yields are rising, and the BoJ is conjuring reserves to defend the cap on Japanese yields, YCC isn’t just contributing to a weaker yen, it’s the proximate cause. In turn, the weaker yen is exacerbating a terms of trade shock, to the further detriment of the currency, in a decidedly perilous loop.
The Kishida government is trying to offset some of the yen depreciation with repeated FX interventions (so, trying to offset the impact of Kuroda’s policies) and, now, will attempt to offset inflation (which is likewise being spurred on by Kuroda) with fiscal stimulus. Some of that stimulus involves handing out yen to households (demand construction), and it’s financed at ultra-low yields brought to you by — wait for it — Kuroda.
Again, that could be the plot of a dark, slapstick comedy about economic collapse. You could easily cast Steve Carell in a Michael Scott-style starring role. I consider myself to be (very) generous when it comes to developed market policy experimentation. I do think rich nations should leverage their status as reserve currency issuers to achieve whatever outcomes are deemed desirable by elected officials. However, let me say this as unequivocally as possible: What’s going on in Japan is beyond the pale. It’s absurd. And it gets more so by the week. I can no longer countenance commentary which suggests (tacitly or otherwise) that any of what’s going on there in terms of monetary, fiscal and currency policy, can be taken seriously.
Coming full circle, it’s important we acknowledge that there probably won’t be an readily identifiable inflection point beyond which it’s unequivocally safe for policymakers to ease off rate hikes or, in Japan’s case, keep easing.
But recent events suggest central banks are willing to risk a premature step-down in the interest of not over-tightening. My own opinion is that such a step-down is the right decision currently, not necessarily “because long and variable lags,” but rather “because,” after more than a decade spent experimenting with ZIRP, NIRP and LSAP, all paired with forward guidance that underwrote the short vol trade in all its various manifestations, continuing to turn the proverbial screws with no regard for all the leverage deployed when yield was impossible to come by, is conceptually akin to dynamite fishing, as one fund manager recently put it.
There are risks on both sides. What I wanted to highlight here (in addition to the absurdity of Japan’s predicament), is that if October did indeed mark the onset of a coordinated “step-down” from developed market central banks, inflation isn’t cooperating. In fact, every print, without exception, has been on the hot side. If that continues, the burgeoning deescalation could be over before it starts.
The effects of global climate change will only exasperate food pricing. Getting it under control and reversing the current trends is absolutely critical to world hunger concerns. Raising interest rates is like throwing snowballs at a lava flow.
The effect of a diseased planet enhances the effect on diseased economic bodies and this serves to enhance the power of the denial side of the binary political belief system resulting in a destructive positive feedback loop akin to a runaway diesel. The only way to stop a runaway diesel is to seal off the air intake, i do not know what the figurative equivalent is in terms of the financial side of things, but i am completely convinced there is no way cut off the the air when it comes to climate change.
“Policymakers are downshifting just as inflation is accelerating” – might just mean that (for a change) they are getting “ahead of the curve”. Agreed re: “dynamite fishing”, but also see lots of evidence in leading – as opposed to what are all concurrent – indicators, that there is downshifting warranted for the curve ahead…and thus the “long and variable lags” factor is just as important.
I have to disagree with your Japan commentary. They are trying to use this crisis to escape a 30 year deflation/disinflation regime with consumers holding back for lower prices. Their economy never fully climbed out of the real estate and banking collapse of the late 80s/early 90s. So kuroda really does not care that much if they get inflation for awhile. In fact the prevailing attitude in Japan is likely very favorably disposed to some extra inflation. They want to change the disinflationary/deflationary psychology, unlike most of the developed markets. Historical context is important here.
RIA
An interesting observation but it is good to remember that today is what is. The past is not the baseline. High inflation, starting today, will quickly erode asset values going forward. Before the great deflation, Japanese citizens were offered individual strawberries for $10/ ea. The total value of Japanese real estate was higher than that of the US. They can’t afford to go back there and the deflation is not going to pay for any coming inflation. Tomorrow starts today, not in 1990.
@RIA There’s nothing to disagree with. I mean, come on. This reminds me a bit of your daily pseudo-denials of America’s inflation reality earlier this year. Sometimes, you have to just accept that no matter what we’d all like to be true, reality isn’t cooperating.
You do understand what’s happening here, right? To reiterate what I’ve detailed on hundreds (literally) of occasions: In the current environment, where US yields are predisposed to rising, Kuroda’s defense of the YCC cap is doubly perilous. Defending it entails conjuring yen (easing), but the cap itself means that whenever JGB yields are at or near the upper-end of the band, and US yields are rising on the same day, rate diffs move in favor of USDJPY upside by definition (because he won’t let 10-year JGB yields go up beyond 0.25%).
That’s potentially ruinous. Look at the trade balance. He’s throwing off huge monthly shortfalls. 14 of them in a row, and counting. And it’s forcing the people across the street (almost literally) to sell their FX reserves to keep his policies from collapsing the currency. How is that healthy?
And as you might’ve noticed, the Japanese aren’t uniformly enamored with 3% inflation. He may want to change their mindset, and we may all agree that a disinflationary mindset isn’t a good thing for the economy, but if the Japanese public doesn’t agree with him (or with us), then they’re going to pile pressure on the government to protect them from rising prices. That’s precisely what’s happening now. And protecting them entails more extra budgets, financed by more debt, which Kuroda then ends up buying. With (sincere) apologies to Kuroda, that’s absurd and more importantly, some would argue that the old Ponzi scheme jokes aren’t jokes anymore.
Also, when you say “In fact the prevailing attitude in Japan is likely very favorably disposed to some extra inflation,” whose attitude do you mean?
I don’t know if you’re aware of this, but the public ain’t lovin’ it.
https://www.reuters.com/markets/asia/bojs-public-relations-crisis-forces-rethink-inflation-message-2022-06-29/
I ate humble pie on this site before. Inflation was more persistent and the Fed needed to tighten policy. I was wrong. The Japanese public probably does not like inflation much. But policymakers are far more tolerant because they spent almost 30 years fighting deflation/very low inflation. Hence they are going to let things roll. My personal view is the Fed is tightening too quickly and that qt is a risky gamble in the functioning of the US treasury market’s liquidity. Monetary policy is a blunt instrument. And we are in an unprecedented environment.
They’re not “letting things roll.” The public doesn’t like it, and now the Kishida government is spending 29 trillion yen (actually more if you look at the totality) to offset the impact of higher inflation. Kuroda is “letting things roll” and everyone else is trying to stop the ball — on the yen, and on inflation too.
The rest of the government is pushing back against the effects of what he’s doing. They’re intervening in the FX market and, now, resorting to extra fiscal measures. It’s costing them billions of dollars and it’ll end up costing them a bajillion yen, but that’s fine I guess because they can always borrow it from Kuroda.
Why should inflation cool?
OPEC wants more money. Workers have fallen behind and want to catch up, all in a tight labor market. CEOs & CFOs will want to maintain profit margins. Putin will try to keep the war going until January 2025 (or longer). Texas may have another cold spike, driving up natural gas prices. Etc.
IMHO the burgeoning deescalation will be over before it starts or will be a brief blip on the road higher; the near future (1-3 years) holds increasing Fed funds rates, higher mortgage rates, generally lower equities, etc.
Central Banks have an oversteer problem and it’s exacerbated when economic conditions like inflation accelerate.