Most central bank mandates (as I have mentioned before) are based on the premise of achieving "price stability". The US Federal Reserve has a dual mandate of not only achieving price stability, but also "promoting" maximum employment.
Falling commodity prices, especially energy prices this year have brought inflationary pressures to levels not seen since 2009 (and 1955 prior to that).
Central bankers try to factor out the more volatile food and energy data in an effort to gage the inflation of "core" consumer prices.
Why the focus on inflation?
Economic theory tells us that as economies grow, greater demand for goods and services puts upward pressure on the prices for them. In order to afford higher prices, workers then demand higher wages.
In the 1970's and early 1980's this became a particular problem as inflation spiked into double digits in many developed countries. In order to slow economic growth and bring inflation lower, central banks were forced to raise interest rates into double digit territory.
Since 2009, the opposite has occurred. In order to promote higher levels of growth (to offset the recessionary pressures from the financial crisis) central banks dropped interest rates to near zero. There are some places where interest rates have slipped into negative territory because deflation (lower value of assets in the future) is a fear.
If (as the more optimistic central bankers are trying to get us to believe) economic growth is returning, where is this inflation?
With August's data
Not in the US:
Not in Europe:
Not in the UK:
Canada's report is due Friday.
Japan will report on Sept. 24th.
Inflationary expectations are a behavioural trait of consumers based on their experience from their participation in the economy. Currently, prices for consumers are low and increasing at levels below most central bankers targets.
Yet any significant economic growth remains elusive (for the moment).
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist