JEDDAH — Global inflation has been on a downward trend since July, mainly due to the decline in the price of oil which is trading at roughly half its mid-2014 value, Asiya Investments Weekly Analysis said. The main factor behind the dip in energy prices was the surge in global oil supply, which has been on an upward trend for nearly two years, finally reaching a record high of 94.9 million barrels per day in the last quarter of 2014 – according to the International Energy Agency (IEA). The large increase in US crude production as a result of the shale boom, combined with sluggish global demand, explains a large part of the supply glut. Inflation has fallen the most in developed economies. Prices in the G3, which consists of the US, the euro zone and Japan, softened from 1.6% YoY in July last year to 0.2% in March. As of March, the US and euro zone were in deflation. Emerging Asian prices also decelerated, to a lesser extent, from 3.2% YoY in July 2014 to 2.0% in March, led mostly by Taiwan, Thailand, Korea and Malaysia. Except for Indonesia and Hong Kong, all major Asian economies witnessed a slowdown in prices. Outside Asia, emerging markets were less affected by the decline in oil prices. In fact, when grouped together, inflation in Brazil, Mexico, South Africa, Nigeria and Turkey was roughly the same in March than in mid-2014, at around 6.5% YoY.
Similarly, price growth in the Gulf stagnated around 2.6% YoY. At the global level, inflation dipped significantly, from 3.5% YoY in mid-2014 to 2.0% in the first quarter of this year. However, prices have not been falling across all types of goods. Core inflation, which excludes oil and food products, has remained relatively stable. In theory, the decline in oil prices should put downside pressure on the price of other goods as production costs fall, while the decrease in headline inflation should fuel deflationary expectations. So far, this has not happened.
Instead, inflation will bottom out this year. As last year's high base in oil prices begins to fade around July, the negative effect of energy prices on annual headline inflation will begin to diminish. Additionally, a barrel of oil is projected to become moderately more expensive in the next few months as a result of softening supply levels. In 2015, the largest US exploration and production companies such as EOG and Devon Energy have already announced large cuts in CAPEX as they adjust to an environment of lower prices. The slowdown in activity is already clear: rig counts have fallen considerably and the growth in US inventory has stabilized lately.
At the global level, oil supply fell for in the first quarter of 2015, to 94.6 million barrels per day according to IEA figures. However, due to weakness in global demand, the price of Brent oil is not expected to exceed $75 in 2015. Finally, a rise in disposable income, due to relatively lower oil prices, may support a recovery in demand and hence fuel small increases in core inflation. In 2015, headline inflation will increase again, mostly in the second part of the year, but will remain lower than in early 2014.
In response to easing prices, central banks around the world have loosened policy, except in the US, through rate cuts and, in the case of the euro zone, an asset-purchasing program. The expected rise in inflation in the latter half of the year will have an impact on policy worldwide, forcing many central banks to reverse policy. The Federal Reserve will consider raising interest rates sooner than expected, possibly as early as September, which will prompt other central banks, particularly in emerging markets, to hike rates in order to curb investment outflows. Additionally, given the recent improvement in consumption in the eurozone, a surge in inflation in the bloc, although unlikely at this stage, may force the European Central Bank (ECB) to reduce the pace of asset-purchasing, or even end it altogether. The rise in inflation will create a setting of tighter monetary policy, however it will be a longer cycle than usual, allowing for the gradual recovery of global demand in an environment of a strengthening US dollar. — SG
