While crude oil prices are projected to average $55 per barrel this year (up 29% from the 2016 average oil price), energy and non-energy commodity price indices are projected to increase by 26% and 3% respectively.

Manish K. Pandey | March 2017 Issue | The Dollar Business

An old friend is back. Actually, it’s more a friend who can go against you if ill-treated. It goes by the name ‘inflation’. Oh yes! Inflation is back, and with a bang. And this time, it has not spared even Japan, a country that has been fighting hard for years now to move out of the deflation zone! Imagine, wasn’t Abenomics all about trying to battle the odds to bring back inflation to a nation where earthquake, kimono and deflation have been battling out for years to win the crown of “Most Common Occurrence”?

While the core consumer prices rose 0.1% year-on-year in January in Japan (the first increase in more than 12 months), consumer prices in the eurozone witnessed a year-on-year increase of 2% in February, reporting the highest annual rate of inflation since January 2013. The story in US isn’t any different. Inflation in US recorded its biggest monthly increase (0.4% year-on-year) in four years, driving the country’s annual inflation to 2.5% in January (this is already above the Fed’s target of 2% inflation).
Inflation has been moving up in China too as capacity cuts and higher commodity prices have been pushing up producer price inflation for quite some time now – in fact, China’s producer price inflation is in a positive territory after four long years of deflation.

So, what’s behind this rise? Mounting crude oil prices and weakening currencies have been the major drivers of inflation across the globe. While oil has recovered fast in the last few months, strong infrastructure and real estate investment in China as well as expectations of fiscal easing in US have strengthened the prices of base metals across the globe. And all this is driving inflation upwards.
Commodity deflation - which has been wreaking havoc on external accounts, exchange rates and liquidity across the globe for more than two years now - is beginning to end with sharp rebounds in prices of almost all major commodities across the globe. Even global industrial activity is recovering in a broad-based manner after slowing for two straight years, with both emerging and domestic markets contributing to the rebound.
 
Critics argue that though headline inflation rates have recovered in many economies (both developed and emerging economies) in recent months, core inflation rates have remained broadly unchanged and are below inflation targets. But take a closer look at the trend and you get it right. “Although the recovery in headline inflation is the most visible, there has also been a shift upward in underlying or core rates. This has been less, since these usually exclude energy,” states a report from Roubini Research.

In fact, a case in point could be China – as already mentioned before, China’s producer prices are now rising (after falling for many years). Further, according to World Bank Commodity Market Outlook, while crude oil prices are projected to average $55 per barrel this year (up 29% from the 2016 average oil price), energy and non-energy commodity price indices are projected to increase by 26% and 3% respectively. If these forecasts are anything to go by, you can expect a rise in core inflation as well.
 
What does will 2017 mean for inflation? Economies where output gaps are still trending in the negative zone and wages are under control, the risk of persistent low inflation remains. For the rest of the world, inflation will continue its slow move upward. Inflation is back and how. And it better be treated fair with prudent economic policies this time around.