Chart Of The Week: Inflation Surge

This week the “Chart of the Week” is a rather peculiar indicator on inflation. The global inflation outlook has been gaining considerable interest as the global synchronized economic upturn gathers pace and central banks start to think about normalizing policy. Clearly some (e.g. the Fed) are more advanced on this than others (e.g. the BOJ and ECB). Inflation has become the baby elephant in the room while the big elephant in the room is still the global turning of the tides in monetary policy.

Anyway, on to the chart (which featured in a discussion on the outlook for the US Dollar Index). The dark blue line is a composite of terms from Google Search Trends designed to capture search interest in inflation (e.g. terms such as “higher inflation”, “why are prices so high”, “prices going up”, “inflation protected”, etc). The main point is that there seems to be a surge in interest in inflation, and that could be an harbinger of things to come.

The black line is the global median inflation rate (across 100 countries), this is designed to give a feel for the global overarching trend in actual inflation. This indicator had been running around a 1% pace from 2015 to late 2016 but has leveled off after a boost from base effects. But back to my previous point, the synchronized global economic upturn is a key theme here, because as the global economic cycle matures, the logical next step is higher inflation particularly as we are seeing capacity utilization tighten across the major economies.

Naturally this presents a conundrum for multiple asset classes because a global generalized resurgence in inflation would see the big quantitative easers (ECB and BOJ) well behind the curve. This could mean a faster change in the direction of monetary policy than expected, which could see the selloff in bonds extended, further strength in the Yen and Euro, and mixed results for equities depending on the region and sector. So this very interesting chart points to potentially a more “interesting” risk and opportunity outlook for markets.