Wednesday, July 14, 2010

Deflation is Coming!

If you write a post with this title a few days after claiming that inflation is coming, you are bound to be right:)

Joking aside, it is not deflation coming, it is inflation expectations falling across the globe, at least for the developed world, as Rebecca Wilder discusses. Being your ever friendly neighborhood economist, let me provide the picture for Turkey, compliments of the folks at Turkey Data Monitor:
Rebecca argues that Eurozone woes are playing a part in the decline in inflation expectations in the UK, US, Germany, Italy and Canada. David Beckworth adds that there is Fed's monetary policy hegemony going on as well.

Without contradicting Rebecca and David's arguments, let me add a couple of small observations on Turkish inflation expectations:
  • Citi economists claim (gimme a break, it is way too late for me to search their paper, but I promise I will email it to you if you ask for it) that more than half of Turkey's inflation is global-based. So if global inflation expectations are rational (Rebecca says they are a bit overdone for the US, UK and Canada), then Turkish expectations are just reflecting to the fact that inflation will fall in Turkey as well.
  • I am no expert in Rebecca's countries, but for Turkey, inflation expectations are extremely adaptive and tend to overreact to positive (lower than expected) inflation prints. Actually, I kind of sensed that argument from Rebecca's post as well, although she does not state it explicitly.
By the way, it feels great to argue that inflation is coming when the global trend is exactly the opposite. But, I was just claiming that inflation is likely to be higher than expected in July because of the very same food prices that have been behind the better-than-expected prints for the last two months.

1 comment:

oil_spill said...

months ago j bullard came out and said that the traditional output gap measures do not account for bubbles so we should not put too much emphasis on these estimates to assess inflationary risks. i haven't done any serious research on this topic but if my guess is correct the Fed uses cap utilization as a primary output gap measure. But they are also right about putting emphasis on high and stubborn unemployment. Average duration of unemployment last month was 35.2 weeks vs 34.4. Now this stat has a very nasty looking chart too. There are a lot of unemployed men and women who will never go back to their old jobs or make the same income as once they were making.

come july 2010 now andrew sentence of BofE says UK unemployment is lower than previous cycles and spare capacity is much less than expected ( now situation in UK is different but when we look at the latest CPI data for US and UK there is one interesting similarity: headline down core up.

Now both bullard and sentance are inflation hawks. And I am quite bearish on economy and more on the low inflation camp but i just didn't like the recent core CPI reading. hope i'm wrong.