So when will we see inflation?

Data this morning shows the Consumer Price Index measure of inflation rose 0.4% year on year in February, down form 0.7% in January, leading pundits to wonder when will we see inflation?

Firstly, the largest downwards pressure in the CPI came from retailers heavily discounting clothes. Clothes prices in February 2021 were down 5.6% from a year earlier, the largest drop in more than a decade. The cost of toys, games and hobbies also pushed the CPI lower, along with the popularity of second-hand cars.

Secondly, as the year progresses the CPI will compare recently raised fuel prices to the heavily depressed prices 12 months earlier, meaning we will see upwards pressure on the CPI this year.

But is it likely we’ll see a sustained period of inflation? Luke Bartholomew, Senior Economist at Aberdeen Standard Investments suggests the evidence doesn’t point to it likely just yet.

Bartholomew echoes Paul Krugman’s three necessary conditions for inflation; a prolonged period of excess demand, a weakening of the nominal anchor which pins down inflation expectations, and a failure of monetary policy over the medium to long run to credibility commit to stabilising the price level.

Bartholomew explains, “The point of spelling out these three conditions is that while the Biden stimulus certainly increases the probability that the US economy will enjoy a period of excess demand (and a very good thing this is too!), there is no reason for thinking it gets us much closer to meeting the other two conditions.”

Bartholomew will be watching price pressure on so-called “sticky prices,” to show signs his and Krugman’s second condition for inflation is being met.

Bartholomew continued, “And even were that to happen, the Fed would still have the power to short circuit any inflationary pressure. Ultimately, in our current macro policy framework, higher inflationary pressure shows up as higher interest rates not higher inflation per se.”

Commenting on sterling coming under pressure after UK CPI data surprised on the downside, Olivier Konzeoue, FX Sales Trader at Saxo Markets, said, “In an environment where markets shifted their focus to setbacks to the recovery from the pandemic globally, putting the USD on the front foot against its main peers, GBP came under further pressure. GBPUSD is now trading south of 1.37 for a 1.35% drop in a day.”