This ultra-low inflation threat has investors on edge
Data this morning showed that French inflation dropped to 0.8 per cent in January, continuing the country’s long term trend of disinflation. In fact, every G7 country is now recording inflation below two per cent.
Though we’re only a month and a half into 2014, only Japan’s CPI appears to be on an upward trend.
Capital Economics think UK inflation could fall to one per cent in the year ahead, and pressures in the US and Eurozone are still muted at best. When was the last time that inflation in every G7 country was below two per cent for a full calendar year?
A graph of the last 50 years of the 20th century illustrates the overall trend – after a volatile post-war period for many countries (especially the former Axis powers), inflation settled though most of the 1960s, rode high in the 1970s and early 1980s, and settled to a converged and low level in the last decade and a half.
But in no single January-to-December year does inflation fall below two per cent in all seven countries during the post-war period. Some come close: the disinflationary late 1950s and late 1990s are particularly notable*.
We have to go further back. Data for CPI wasn’t recorded in many countries this far back, but Carmen Reinhart and Kenneth Rogoff’s This Time is Different includes a comprehensive collection of estimates going much further back.
For the last full year for which consumer prices rose by less than two per cent in every G7 country, you have to go all the way back to the peak of the Great Depression, and the deflation of the early 1930s. In 1932, only Japan saw inflation at all, of 1.1 per cent.
Though Germany is not included on the graph, since the unprecedented volatility of the 1920s warps the visual effect, consumer prices dropped by 22.7 per cent in 1932, and 16.7 per cent in 1931. That year, every country in the current G7 recorded dramatic deflation, with French prices falling by four per cent (the shallowest drop)
So keep an eye on December – because if Japan’s increased CPI doesn’t go much higher, and the UK’s stays low, it would be the first time in 82 years.
*In 1959, every country except France matched the terms. In 1998, Italian CPI just pushed to two per cent, following the convention of rounding to the nearest decimal place. This is not cheating.