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 The U.S. Federal Reserve, the Bank of England and the European
Central Bank all have been disappointed to varying degrees about how
little inflation has picked up, or indeed how it has spent too much
time going the opposite way.
The Bank of Japan, which has been trying to ward off deflation going
on two decades, has now been hit with a counterproductive surge in
the yen after a contested decision last month to adopt a tiny
negative interest rate.
Even in China, where it is difficult to fathom the sheer magnitude
of fiscal and monetary stimulus Beijing has piled on since the
financial crisis, consumer price inflation is remarkably tame and
likely to remain so.
For developed economies, the worry is whether a slowdown in growth
over the past several months will get in the way of what many
central banks are hoping for: pressure on inflation through wages as
labour increasingly becomes more scarce.
Already there are signs the dramatic fall in unemployment in the
United States and Britain, and to a lesser extent the euro zone, is
starting to slow, which is normal this far into an economic
expansion, albeit an uneven and lacklustre one.
"The U.S. merits special attention," writes David Hensley, a
director of global research at J.P. Morgan.
"If the U.S. unemployment rate were to stabilize at 5 percent, the
Fed would have much less incentive to hike rates unless this level
of unemployment turns out to be low enough to generate a sustained
rise in wage and price inflation, something Chair Yellen has
expressed considerable skepticism about."
So far, measures of underlying price pressures that strip out
volatile energy and food prices have risen to close to or even above
where the Fed likes them to be. But they have shown little sign of
climbing beyond that, hence the caution on rates.
U.S. inflation as measured by the Consumer Price Index (CPI) is
expected to rise to 1.2 percent on a year ago, and steady around 2.3
percent on a core basis, according to a preliminary Reuters poll of
economists for data due on Thursday.
EUROPE
In Britain, where the central bank has left its key interest rate at
a record low for seven years and shows no sign of moving for at
least another, inflation is even weaker.
The UK CPI is forecast to rise by just 0.4 percent on a year ago and
1.3 percent on a core basis, in data due Tuesday, a few days before
the Bank of England sets policy. No dissent on a
unanimously-forecast decision to leave rates steady is expected.
[BOE/INT]
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The UK jobless rate has stabilised at 5.1 percent over the last few
months. That has followed a recent softening in wage inflation as
well as a slowdown in economic growth and investment plans ahead of
a June 23 referendum on whether Britain should remain in or leave
the European Union.
In the euro zone, where the European Central Bank just delivered an
unexpectedly large dose of extra stimulus, growth has been holding
up relatively well, but progress in getting the unemployment rate
down has also slowed.
Euro zone inflation is expected to be confirmed at -0.1 percent,
well short of its goal of just under 2 percent.
If that itself weren't enough of a worry, the euro, like the yen, is
stubbornly rallying just when central bank policymakers have
delivered stimulus with the hope of spurring on export performance
and importing inflation from abroad.
This suggests to many observers that central banks are near or at
the end of their policy reach.
The start of the U.S. company earnings season is also set to kick
off, with hopes abound that a reprieve from the dollar's climb may
improve the outlook after one of the most volatile starts to the
year ever for Wall Street.
The worry, again, is that a tamer dollar will hurt performance at
companies based in Europe, Japan and elsewhere, underscoring the
reasons behind the Fed's caution about the international backdrop
behind its policy stance. [nL3N179425]
What might end up grabbing even more attention before the World Bank
and IMF meetings at the end of the week could hit the root of much
of the Fed's caution since it began contemplating its first rate
rise in nearly a decade last year.
Optimism, not pessimism, about China appears to be on the rise, with
most forecasters broadly looking for stabilisation across swathes of
key economic indicators. [nL3N17826X]
(Editing by Jeremy Gaunt)
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