Central banks create inflation - but not in consumer prices
Risk of creating new bubbles
New bond yield conundrum on the way?
US housing and capex picking up, core inflation rises further
In recent years, global central banks have made a strong effort to revive the economies by cutting rates to zero or negative and pumping large amounts of money out through quantitative easing (QE). Since 2008, the Fed, Bank of Japan and Bank of England have bought assets amounting to USD5trn, corresponding to about a third of US GDP. The QE sceptics warned that QE could end up in a burst of higher prices as inflation is ultimately a monetary phenomenon. However, despite the significant increase in money, there is very little sign of consumer price inflation – on the contrary, the predominant concern is rather deflation or too low inflation relative to central bank targets around 2%.
However, it’s not true that there is not any inflation. It’s just not in consumer prices. Instead, it is showing up in asset prices. Pretty much all assets have been going up in price for some time and many of these have now become expensive – some even very expensive: global stocks have increased 50% over the past two years and valuation in several key markets is starting to look stretched. High-yield spreads are trading only marginally above the spreads prevalent ahead of the financial crisis. Government bonds in peripheral bond markets have had a remarkable performance – 10-year Spanish yields are now at 2.65%, the lowest level in 200 years. In core government bond markets, German 10-Year government yields at 1.25% are close to the lows during the euro debt crisis.
The truth is that it’s very hard to create consumer price inflation when a) unemployment is very high and wage growth therefore subdued and b) a positive supply shock (this time shale oil) is adding to the downward pressure on inflation. Central banks are pushing on a string and the more they push the higher the risk of new asset bubbles. Choosing between two evils, it might be that inflation below target for some time is better than the risk of creating new asset bubbles, which could ultimately lead to a new financial crisis and a high risk of deflation at a later stage.
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