Inflation? What inflation? (log annual and monthly changes; 2000=100):
The annual rate of increase across all three of my inflation measures appears to have peaked – the monthly rate of increase for May is virtually zero i.e. there’s been precious little price changes between April and May.
Even food prices have been pretty well behaved (log annual and monthly changes; 2000=100):
There hasn’t been a real uptick in food prices in three months. The only real price action is in components where I expect and want to see price increases anyway (log annual and monthly changes; 2010=100):
Why would I want to see price increases in these costs? Because these are service sector costs, driven largely by higher wage costs i.e. this is evidence of a rebalancing away from tradeable goods and services towards non-tradeable goods and services, which is a requirement for higher real household incomes.
Apart from these, increases in prices over the past year have been almost entirely policy-induced, from the 20sen cut in petrol subsidies last September to the electricity tariff hike in January.
Concerns over inflation are therefore rather a bit overblown – by the same token, concerns over negative real interest rates which could induce excessive borrowing and penalise savers, are also overblown:
Based on a monthly approach to calculating the real interest rate, it’s still higher than it was a year and a half ago. The last time BNM raised the OPR, it began the cycle in March 2010 and took a hiatus in July after three consecutive rate hikes; all while the real interest rate (both monthly and annual) was positive. A further 25bp hike was made in May 2011, when both were negative.
Such a move might have been justified at the time, as on both an annual and monthly basis, the real interest rate appeared to be trending down. That’s not the case now, where they both appear to be trending up.
If there is going to be a change in the stance of monetary policy, it’s not going to be because of inflation or real interest rates.
May 2014 Consumer Price Index report from the Department of Statistics