Deflation and Inflation Evaluation

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Globally, deflation is no longer the major risk and inflation is under control. The G-3 Central Banks have done a good job of escaping deflation though they are still not at their (generally) 2% inflation targets. We expect that 2018 will see both the FOMC and ECB begin to normalize their balance sheets and that the BoJ will remain accommodative well past 2018. There are likely to be unanticipated effects from the normalization since it is uncertain how exiting from QE will work in practice. As a result, we expect the Fed and ECB to move slowly and on net, global monetary policies will remain accommodative in 2018. With the G-3 growing at above trend rates, this is a good scenario for riskier assets.
Globally, inflation is not a major problem. The IMF measure of GDP-weighted CPI inflation has averaged 3.6% over the past 10 years, sub-3% over the past three years. Importantly, global liquidity has stabilized in 2017 after a long decline. The IMF measures total world foreign exchange reserves. We see this as a form of a world-wide exchangeable monetary base. That’s because it is basically the total of all the foreign assets on all central bank balance sheets. The rebound is positive for maintaining global growth. For more insights on the global markets, please see the full list of our latest commentaries. - Special Guest Blogger: Tim Kearney

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