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The sad story of global inflation Cycles come to an end because central banks raise interest rates to suppress inflation.

The Economist

Whatever the popular story of the time, the reason that cycles come to an end is that central banks raise interest rates to suppress inflation.

Initially, business and consumer confidence prevents interest rates from having an immediate effect. Later, leverage and over-expansion on two or three sectors of the economy usually cause a bigger decline in economic activity than is expected. At least it has been this way since the late 1970s.

Figure 1 shows the rate of inflation (core CPI) for the G7 and BRICs economies in the year ending Q1 2018, and for comparison, in the year ending Q3 2007, the peak of the last cycle.  

  • Core inflation (excl. energy and food) is below target in five of the G7 economies and on target in the U.K. and the U.S. It is also considerably lower than at the peak of the last cycle in the most important developing economies (the BRICs);
  • The U.K. has the highest core inflation among the G7, which partly reflects a tight labor market but is mainly due to the specific effects of Brexit;
  • Abenomics appears to be succeeding in Japan, where the economy seems at last to be breaking out of its long period of deflation. This is one country in which a significant increase in inflation is a good thing!

Why, after almost ten years of economic expansion, is inflation so low?

  • The world economy still has spare capacity. Although the U.S., Germany and Japan are operating at full capacity, the rest of the advanced economies still have some slack to use up. The level of unemployment in the EU as whole, for instance, is higher than the previous cyclical low. Emerging markets also have quite a lot of spare capacity, partially due to the severe commodity slowdown that took place between 2015 and 2017. Meanwhile, global capacity may have been increased by the rise of the “sharing economy.” CBRE Research has discussed its real estate and retail implications but the overall economic impacts have yet to be fully understood.
  • A sense of insecurity has taken hold of workers in the advanced economies which reduces the incentive to forcefully pursue wage increases. According to The Pew Research Center: “A majority of Americans (63%) believe jobs are less secure now than they were 20 to 30 years ago, and about half (51%) anticipate jobs will become less secure in the future.”

Despite its many benefits, automation, this cycle’s major storyline, undermines economic optimism. “Disruptions” by technological advancements generate many more negative than positive headlines. USA Today’s take on a recent McKinsey report says: “Automation could kill 73 million American jobs by 2030.”

The Economist

About Richard Barkham

Richard Barkham

Richard is a specialist in macro and real estate economics. He joined CBRE in 2014 as Executive Director and Global Chief Economist. Prior to taking up his position with CBRE Richard was a Director of Research for the Grosvenor Group an international business with circa $10bn of capital under management in real estate. He was also a non-Executive Director of Grosvenor Fund Management where he was involved in fund strategy, risk analysis and capital raising. Richard is the author of two books and numerous academic and industry papers. In 2012 he published Real Estate and Globalisation (Wiley Blackwell, Oxford), which explains the impact on real estate markets of the rise of emerging markets such as China and Brazil. He has extensive consulting experience and is a Visiting Professor in the Department of Construction and Project Management at the Bartlett School, University College London. He holds a PhD in economics from the University of Reading where he taught, in the Departments of Economics and Land Management, between the years of 1987 and 1998.​​​

Articles by Richard Barkham

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