This inflation mystery clouds the central bankers’ meeting in Wyoming
‘The message from Jackson Hole, is likely to be a carefully balanced one that accentuates the shift towards less accommodative monetary policy but stresses the importance of a durable rise in inflation as a condition for removing stimulus more aggressively’
Japanese policymakers are entitled to feel a tad smug.
Last week, it was revealed that Japan’s economy, which has struggled to emerge from two decades of deflation and paltry growth, expanded at an annualised rate of 4 per cent in the second quarter of this year - its sixth consecutive quarter of growth and its longest unbroken expansion in more than a decade.
Five years after premier Shinzo Abe launched his much-trumpeted “Abenomics” programme of fiscal and monetary stimulus, it appears that growth is becoming entrenched and, crucially, is being driven by domestic demand. In June, the International Monetary Fund declared that Abenomics was a success.
Other leading advanced economies are also enjoying strong recoveries.
The eurozone is growing at its fastest pace in six years, with manufacturing and service sector output expanding in all 19 countries in the bloc. Even Italy, the most vulnerable major economy in Europe, grew at an annualised rate of 1.5 per cent in the second quarter of this year, the fastest pace since early 2011. In the United States, the economy continues to grow steadily and is closing in on full employment, while Canada is enjoying its longest sustained run of growth since 2014, expanding at an annualised rate of more than 4.5 per cent in May.
Given the pick-up in growth in developed economies, it is not surprising that central banks are tilting in a more hawkish direction.
The Federal Reserve has already hiked interest rates three times since December while Canada’s central bank raised rates last month for the first time since 2010. The European Central Bank, meanwhile, is preparing to begin scaling back, or “tapering”, its two-and-a-half-year-old quantitative easing (QE) programme - probably early next year - in what is seen by international investors as the most significant shift in global monetary policy since the Fed’s decision in 2013 to start winding down its asset purchases.