When, if ever, will global inflation rear its head?

It has been several decades since there has been real inflation in the prices of products and services in the world. When there was inflation, it concerned the inflation of financial and real assets, that is, an increase in real estate and stock prices. This fact allows central banks to continue to leave interest rates at zero and continue to print money.

The US Fed and the Bank of Japan print significant amounts of money every month in order to weaken the local currency and accelerate growth in their countries. The European ECB, which injected a trillion euros a year and a half ago, during the great debt crisis that Europe experienced, also emphasizes every month that if necessary, it will not hesitate to restart the printing presses. Such a massive influx of money, alongside low interest rates, and with the improvement in the global economy over the past year, was supposed, at least according to the "book", to eventually produce inflation.. Let us recall that in the 1970s, the US Fed reduced interest rates from 131% in June 1974 to 5.51% in March 1975 and held them at these levels for far too long until the early 1980s. The goal at the time was to try and pull the US economy out of recession, but this came at a heavy price in the form of Double-digit inflation, Against this backdrop, there was a very strong increase in oil prices.

However, for now, this scenario does not exist today. Inflation In the Western world, inflation, which is a key indicator in the central banks' consideration of whether to raise interest rates, continues to remain at a very low level. For example, in the US and Germany, actual inflation in 2013 amounted to 1.51% and 1.61% respectively, and in 2014, according to forecasters, it is expected to be 1.71% and 1.41% respectively. Inflation expectations too 5- and 10-year yields in the Western world continue to be subdued, although they have risen slightly recently on the back of rising commodity prices. In the US, 5-year yields are around 1.8%-2%, and 10-year yields are around 2.1%-2.2%.

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The country that actually saw a jump in actual inflation and inflation expectations in the past year is Japan, A country that has suffered from deflation for about two decades. While inflation in 2013 amounted to 0.35%, it is expected to reach 2.5% in 2014, and 5-year inflation expectations have also jumped in the last six months from 1.2% to 2.4%. This is due to the aggressive economic program implemented by the government and the central bank in order to stimulate the country's economy after two lost decades.

What has so far prevented an inflationary outbreak in the world, given the enormous amounts of money being "poured" by central banks and despite all the warnings from economists about the heavy cost of printing money?

The main reason why there has been no jump in inflation is the excess supply that exists in the world. The crisis that the Western world has experienced in the past five years, which initially led to a recession and then to very low growth, alongside high unemployment rates, has led to a decrease in total demand. On the other hand, on the supply side, there is currently excess capacity. For example, in China, in recent years, they have continued to invest massively and built huge amounts of factories, which are currently operating at partial capacity due to the large excess supply. Another reason is that a significant portion of the money that central banks print is lying in the basements of local banks, and the latter are in no hurry to provide credit to business and private entities for reasons of conservatism, in terms of "burning in the furnace, being careful in the sun." These reasons have led to a decrease in commodity prices in recent years, and as a result, both actual inflation and inflation expectations have remained at a low level.

And what about the local economy?

Israel has experienced an inflationary decline in the past year for a number of reasons. The global slowdown is giving its signals to the local economy, which is showing moderation in growth. Also Appreciation of the local currency, along with the decline in world commodity prices in the past year (not in the recent period), have led to cheap imports of products and goods. In addition, regulation has pushed and continues to push to lower the cost of living, such as the reforms that the communications industry has undergone, and currently the food industry, and perhaps in the future even the real estate industry, are helping to curb local inflation. All of this has brought actual inflation to 1.2% in the past 12 months and lowered 10-year inflation expectations from a level of 2.6% about six months ago to a level of 2.4% today.

And what about looking ahead? Will global inflation continue to be "on a low note" in the coming years, or might it start to rear its head?

In our opinion, If the improvement in economic data in the Western world in general and in the United States in particular continues At the pace of the past year, we are expected to see a continued slight increase in inflationary expectations, due to an increase in demand that will "close" the excess supply and lead to price increases. This currently increases the attractiveness of the tight channel in the medium-long term in each of those countries. Regarding the question of whether we are expected to have high inflation levels in the coming years, it is important to remember that inflation is usually created by expectations that feed into themselves. As long as the public has confidence in central banks regarding their ability to maintain price stability, then inflation will continue to remain at reasonable levels and will not develop into excessively high inflation. A condition for this is that central banks continue to have their "hand on the pulse" and will not hesitate to raise interest rates as soon as they identify a danger of a real increase in inflation.

The graph below shows 10-year inflation expectations in the various countries, which have been relatively at the same level for several years, except for Israel, where a slight decrease was recorded.