QVMS - Chart Of The Week - Disinflation Desire

Summary

• The global PMI pricing pressure indicator has rolled over from its peak earlier this year.
• If the past correlation to commodities holds, there should be further easing of pricing pressure as commodities weaken.
• Pricing pressure remains an obstacle to any potential policy pivot. Despite pricing pressure easing, it remains in the upper range of the past decade.

Pricing Pressures Peaked (Piqued?): The global PMI pricing pressure indicator peaked earlier this year, and if past correlations hold we should expect further easing of pricing pressures as commodity disinflation takes hold.

A key reason why the apparent correlation in this chart “works“ is because firstly commodity prices have a direct impact on costs, but also a key driver of marginal demand for commodities is the actual business cycle itself.

General demand levels go up = general pricing pressures go up (“ceteris paribus“).

On that note, the increasing downside risks to global growth that we are seeing (weaker data, downward sloping leading indicators) will likely weigh further on commodity prices and further contribute to easing of price pressures.

Indeed, this is all part of the monetary policy plan: tighten policy, crush growth, send inflation lower.

And that’s one reason why we still can’t get excited about a potential policy pivot or even a pause just yet. Astute observers will note that while the PMI pricing pressures index has come down, it is still at the upper end of the range of the past decade.

So if your job KPIs are to bring down inflation and to avoid anchoring inflation expectations higher, then you’re going to stick to that monetary policy plan: tighten policy, crush growth, send inflation lower…

Key point: Pricing pressures peaked thanks to commodity disinflation.

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