The disinflation trend globally – including in Asia-Pacific – since January has given governments more leeway as to how they respond to current economic and fiscal woes. China, among others, has done a good job of dampening price rises, argues Alberto Cavallo, co-founder and executive vice-president of inflation data provider PriceStats.
“The only countries we cover showing higher inflation rates than a few months ago are Brazil, Russia and South Africa,” he notes. “The rest are seeing major disinflation – this is a good thing for investors and economies in general, because it will give central bankers a lot more flexibility.
"It takes away the concerns about inflation for many governments. In 2011 many central bankers were worried that their expansionary policies would bring higher rates of inflation later on, but that is not happening at all. Inflation is now falling steadily around the world,” says Cavallo, who is also assistant professor of applied economics at Massachusetts Institute of Technology.
PriceStats has partnered with State Street Global Markets to create the State Street PriceStats inflation index, which uses online prices from retailers to estimate inflation on a daily basis for 18 countries. It releases a daily inflation series with a three-day lag that tends to indicate the inflation trend a few months ahead of each country’s consumer price index.
The company doesn’t produce an aggregate index for China, because the required data is not available, such as CPI weightings. Instead it provides a supermarket index and fresh food index.
The supermarket index peaked around April last year, shortly after the central bank said it would raise rates, but started falling after that, stabilising at around 3–4% for the past seven months or so. Interestingly, the actual CPI kept rising after April but in December fell into line with the downward trend.
The China fresh food index follows a similar trend, but instead of falling very rapidly after April 2011 from a peak of around 14%, it fell steadily and is now around 0%, indicating there’s been almost no inflation in the past year.
"So the Chinese, who were worried [about potential inflation] a year ago and started increasing rates, were successful at controlling inflation,” says Cavallo. "The inflation rate is now very stable, consistent with a growth slowdown, not a recession."
"Australia is also in sync with the global disinflation trend we're seeing, and won’t be pressured to change interest rates in the short run, which will maintain stability," says Cavallo. The central bank will be focused on growth in the coming months, he adds.
Meanwhile, the State Street PriceStats Japan index showed a higher rate of inflation in June and July 2011 following the earthquake in March last year. It rose more than the official CPI, but since then has been stable, says Cavallo.
Investors could potentially use PriceStats’ data to help decide on allocations between inflation-linked bonds and nominal bonds, says Cavallo. “For example, if our index shows that inflation is rising before it’s reflected in the CPI, you would go long in Tips [treasury inflation-protected securities] and short nominal bonds.
“You could trade the bonds in liquid markets like the US or UK, or use ETFs that mimic the position of going long in Tips and short nominal bonds,” adds Cavallo.
Investors could alternatively use a portfolio that has been shown to be correlated with inflation versus one that has not. When inflation is set to rise, it’s a signal to switch to the non-inflation-correlated portfolio.
Meanwhile, the range of PriceStats data is set to expand. Within the next two years, the company aims to broaden the number of countries it covers to at least 40, including Hong Kong, New Zealand, Singapore and South Korea.
“We have been collecting online data for 50 countries since 2008/2009,” says Cavallo, “but we need at least two or three years of data for a country before we release an aggregated index.”
He hopes to cover countries such as India and Indonesia further down the line, “but there are limitations in certain countries to the way PriceStats can collect data. It will depend on the online markets in those countries”.