On December 13, 2016, five economists from BSI Economics (1 rating agency, 2 banks, 1 central banker, 1 asset management company) met to discuss inflationary pressures in 2017 and the associated risks to the global economy.
A resurgence of inflation in early 2017, which would subsequently ease
Inflationary pressures will be strong in early 2017, mainly due to the recent rise in oil prices, which are expected to stabilize above $55 per barrel, and a favorable base effect compared to January 2016. There was consensus on the significant decline in the risk of deflationary pressures on the economy and on a limited rebound in economies in the first quarter of 2017. On the other hand, there was lively debate about whether inflationary pressures would be strong enough to enable a sustained acceleration in prices across all economies.
Average Brent crude price of $55 per barrel in 2017
The recent rise in oil prices seems justified in light of the OPEC agreements of November 30, 2016, and recent statements by Saudi Arabia and Russia regarding stronger coordination to reduce production. This decline in production, albeit from record levels, would reduce inventories and support a price per barrel of between $50 and $60 in 2017. Forward prices, which currently anticipate a barrel price of $56 in the first half of 2017 and then $55 in 2018-2019, would confirm a positive correlation between the dollar and the price per barrel (a correlation that is usually negative). However, economists have pointed out the limited predictive power of forward prices, particularly their significant contribution to forecasting errors in inflation models.
United States: inflationary pressures with moderate effects on activity
In the United States, a 25 basis point increase is expected on Wednesday, December 14. Inflation is expected to remain below 2% in 2017. The upward trend would be supported by strong job creation, which would signal an imminent increase in wages. However, this would be partly offset by the appreciation of the US dollar, which would reduce inflationary pressures on imports and mitigate the positive contribution of higher oil prices by reducing export momentum and tightening financial conditions unintentionally. Overall, as noted in the latest Beige Book, recent price increases are expected to have only a modest dampening effect on activity. The Fed is therefore expected to strike a cautious tone this evening regarding future rate hikes.
Eurozone: 0.5 percentage point increase in inflation expected
In the eurozone, a €10 increase in the price of a barrel of oil would imply an annual gain of 0.5 points on the price index, including a 0.35-point direct effect from the petroleum products component and a 0.15-point indirect effect from the transport and rent components in particular. Food prices would remain moderate and the price-wage loop relatively sluggish, confirming weak wage growth, which in 2017 would be mainly supported by higher variable income. The increase in the minimum wage is expected to remain too limited to have a significant impact on the overall price trend. On the other hand, year-on-year price increases for manufactured goods could benefit from a rise in the price of imported goods due to the depreciation of the euro, an effect that will be felt throughout 2017 and is expected to fade in 2018. Finally, in the United Kingdom, inflation has picked up significantly, rising from 0.4% in June 2016 to 1.2% year-on-year in November, confirming the effects of the depreciation of the pound sterling on import prices. Nevertheless, the Bank of England is expected to maintain the status quo on Thursday, December 15, 2016, as the effects of Brexit are still not very visible on economic activity.
China: upward price trend but likely slowdown in activity in 2017
In emerging countries, inflationary pressures on producer prices in China intensified, with a year-on-year increase of 3.3% in November compared with 1.2% in October. This is a positive development, as PPI growth is reflected in consumer price indices over a 12- to 18-month horizon. In Brazil, inflationary pressures are easing, with a rate of 7%, close to the upper limit of the Central Bank’s target range (6.5%). Several cuts in key interest rates are expected in 2017. Finally, in Russia, the recent rise in oil prices is expected to boost economic activity and contribute to the appreciation of the ruble, with a moderation in import prices that would be favorable for economic activity.
