Real podcast problems
As deflationary disappointment continues, we think that structural drivers are making it hard to generate wage inflation. As central banks all try to bluff it out, I take a tour of the pressures facing the US, UK and Europe and what we think it means for asset classes.
We’ve been thinking about deflation for some time, for example James‘ post from last year - Is US core inflation picking up? I recently updated our thoughts in a podcast session hosted by Brewin Dolphin Financial. To whet your appetite, in this piece we take a quick soundbite-world-tour of deflation and what it means for different markets.
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On the US
One of the reasons why they’re [the official inflation numbers] low, is that people aren’t pushing for higher wages, because actually the inflation they’re experiencing by playing Pokemon Go or watching Netflix, these are relatively low cost goods they get a lot of enjoyment from, they feel better off…This is exactly what we saw in Japan…that deflationary mind-set and those lower inflation expectations actually drive lower realised inflation and this is a recognised problem.
This has turned into a bit of a game of bluff… [The Fed] almost certainly have concerns about the lack of inflation, but if they admit to them there’s a very real risk it drives down inflation expectations even further, because that’s like [them] saying, “yes we were wrong”…that would be almost Central Bank capitulation.
There’s a little of that argument saying, “manyana manyana, it’ll all be okay tomorrow”, and you just hope that it is, and you really only face up to it when you have no choice, and that point is coming.
On the UK
What we think is more likely…[is that the Monetary Policy committee will] reintroduce the counter cyclical buffer…This [mechanism] is…part of managing the banking system and avoiding a return to the excesses that led to the financial crisis and is to try and make them hold more capital when things are going well, so they have capital to release when they actually need it.
On the EU
The problem they [the ECB] have...is you have these extremes between Germany and the peripheral countries who fundamentally need different financial conditions. So we would expect the QE (quantitative easing) toslowdown either way, but to be clear, the way that the ECB looks at QE…they argue that slowing the rate of QE is just slowing the rate at which they’re easing conditions, whereas a lot of people, myself included, worry a lot about the flow of QE as well as the pure stock, and so for us, we do see it as a form of tightening.