Why isn't inflation rising?

Economic growth is picking up almost everywhere in the world and the oil price is on the rise again. So why is it that inflation just won't rise?

A visit to the gas station is slowly becoming a lot more expensive: 1 liter of Euro 95 costs almost €1,75 and that was only €2016 at the beginning of 1,50. The main cause of that increase is the rising oil price. On the world market, almost $75 is paid for 1 barrel of Brent oil. That is more than twice as much as 2 years ago. Such a price increase usually leads to rising inflation. For the time being, however, there is little sign of this; This is much to the chagrin of central bankers.

Everything from the cupboard
In Europe, the United States and Japan, central banks have done almost everything in recent years to stimulate inflation (towards the target level of 2%). Such a pace is consistent with healthy economic growth. Despite rising oil prices and higher economic growth, inflation in Europe and Japan remains stuck at just over 1%.

An important exception is Great Britain, where inflation stood at 2,5% in March. However, this high level is entirely the result of a significant fall in the pound, which has caused the prices of imported items to rise sharply.

Wage growth is disappointing
There are several reasons why inflation is not rising convincingly. An important cause is the lack of significant wage growth. Although unemployment has fallen significantly in recent years, this hardly translates into higher salaries. Consumers therefore hardly have any more money to spend.

Another factor is that credit growth is lagging behind what central bankers would like to see. On the one hand, the interest rate is very low, but because banks are reluctant to grant loans under pressure from new rules, it is not automatically easier for companies and consumers to obtain money.

All eyes on May 10th
Indirectly, inflation plays an important role in currency markets. The central banks largely tailor their interest rate policy to inflation developments. Reports that the Bank of England is likely to put interest rate hikes on hold due to disappointing inflation figures led to a fall in the pound (-2%) in April.

On Thursday, May 11, it will become clear which direction some major currencies will choose in the coming weeks. Both the British and American inflation figures will be published on May 10, while the Bank of England will make an interest rate decision on the same day.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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