LONDON: Disinflation is not dead, just resting. The risk of uncontrolled falling prices, one of central bankers’ greatest fears, is receding. But this is more cyclical improvement than secular trend.

Eurozone data on April 30 showed no change in the consumer price index, an improvement on last month’s 0.1 per cent dip. The same day, US statistics showed a 2.8pc annual increase in US total employment costs.

That figure, a good measure of wage inflation, rose the fastest since the beginning of the financial crisis. A steady fall in unemployment finally seems to be putting upward pressure on wages.

What has happened? To start, oil has changed roles in the deflation drama. Last year’s rapid fall from $114 to $45 for a barrel of Brent crude pulled down prices and expectations. The 47pc rise from the January trough will help keep the deflationary psychology from taking root.

The economic environment is also becoming more helpful, most clearly in Europe. In the United States, GDP stalled in the first quarter, but the labour market continues to improve — and wages ultimately help drive prices. Japan is the only big developed economy where the economic momentum is not pushing against disinflation.

Inflation is likely to quicken a little from here. At the margin, that implies higher yields, and lower prices, for government bonds, and a shift towards inflation-proof assets like equities and real estate. It could embolden policymakers to step back faster from QE.

However, the central banks’ 2pc target still looks elusive. For one thing, the recoveries remain tepid. Also, the oil boost to prices might not last. The current price of $66 a barrel is probably too high to keep global supply under control.

Then there is demographics. For 35 years inflation rates have trended downwards, with each peak in most developed economies lower than the one before. The best explanation is ageing and sometimes shrinking workforces. As workers get older, they become less anxious for pay rises. If something like that is curbing wage growth, the challenge to central bankers will last a lot longer.

Published in Dawn, May 3rd, 2015

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