The mystery behind low inflation

"There are very few OECD countries where inflation tops 3%. Turkey is one of the rare exceptions, with inflation running at 11.2%. With inflation of 2.9%, the UK is not far off the 3% level, but this situation is due entirely to sterling’s depreciation," Natixis analysts point out.

Key quotes:

"Low inflation is in evidence even in countries having reached full employment like the US (inflation is described by the Fed Chair as a “mystery”), and of course in Japan (0.7%). Globally, therefore, the behaviour of prices is providing scant support for breakeven inflation rates."

"The other fundamentals of breakeven inflation rates had been on the up in recent weeks: the price of Brent crude appreciated in September (even if it has tended to consolidate in recent trading sessions) and equities have moved higher (in particular in the US, where the S&P 500 has set new record highs). At the same time, equity volatility has subsided (VIX currently just shy of 10%)."

"Breakeven for the Bund€i progressed in September and seems to have reached a new equilibrium point around 1.23%. Much the same for the breakeven for the 10-year TIPS, which has put on around 10bp. Unsurprisingly, the breakeven for the 10-year index-linked Gilt has soared: it now stands at 3.17%, its highest level since April. This rise in inflation expectations in the UK is not a welcomed development for the Bank of England, confronted, as mentioned above, by a conflict between its inflation mandate and its reluctance to penalise growth."

"The spread between 10-year swaps on French inflation and on Eurozone inflation weakened in September after the decision to freeze for two years the rate for the A passbook deposit. This spread narrowed to 4bp last month. It has since recovered to 5bp (see this month’s chart on page 9)."

"Inflation swap curves have continued to flatten: the euro 10Y-2Y spread tightened by around 5bp, its US counterpart by around 10bp. The contraction in the US is due largely to the short-term inflationary impact of the hurricanes that struck the southern states."

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