Disinflation and a New Monetary Easing Cycle

February 09, 2015 |Author: EGA Investment Strategy | Categories: Chart of the Week, Emerging Markets

Explaining disinflation. The precipitous fall in the price of oil and slowing growth has put downward pressure on headline inflation. Emerging market (EM) economies have experienced a near uniform drop in inflation except for a small number of countries, most prominently Brazil and Russia. In Brazil, higher regulated prices (mainly transportation and energy costs) have kept inflation stubbornly high. In Russia, lower oil prices and sanctions imposed over Ukraine have driven down the value of the ruble and caused inflation to rise.

Central banks react. As inflation falls, real interest rates rise. Central banks worldwide have responded by reducing interest rates. They have done so in Chile, China, Greece, Hungary, India, Korea, Mexico, Peru, Poland, Russia, Thailand and Turkey.
         
Will the cheaper cost of borrowing benefit EM? Not just yet. Usually interest rate cuts are supportive of economic growth and stock market performance, but EM central banks have kept the real rate of borrowing constant, so the net stimulus to the real economy thus far has been negligible. However, lower interest rates may help export competitiveness through currency weakness. We believe EM needs a combination of continued reforms and more aggressive central bank stimulus, which should help stabilize growth. 

 

Definitions

The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is sometimes referred to as headline inflation.

Headline inflation is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes, such as food or energy.


 
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