Budding inflation

We often write about the impending inflation. In this regard, I have been discussing it with a colleague of mine, whether we at Alapblog do not see any price rise in the world, or he is the one who cannot ‘see the inflation for the trees’ and learn from retrospective indexes and models. It is always easier to say what happened in the previous quarter, than trying to figure out the developments in the next, because that is the only one that makes profit. Sometimes it succeeds, sometimes it does not.

Czech (green), Romanian (grey), Hungarian (red) wage rise and inflation (Source: Reuters)

Czech (green), Romanian (grey), Hungarian (red) wage rise and inflation (Source: Reuters)

Our starting point is that where wages are rising at such a rate (the top three lines in the graph) there – even many other factors play a role – has to be an inflation coming soon. However, the Excel chart shows that there is no inflation (the bottom three lines in the graph) – or at least there was not until the first half of 2016, and there has not been more than 2 percent.

However, nowadays we can have a different approach to inflation because it seems that markets are moving in that direction too. Maybe the labour migration and the resulting wage rises have ripened, or now at least more and more market players anticipate it to do so.

The following figure shows the Czech, Romanian and Hungarian three-year yields. The market in two countries estimates an imminent interest rate increase or at least monetary tightening. Hungary, however, does not, even though wage-dynamics are similar.

Czech (green, left scale), Romanian (grey, right scale), and Hungarian (red, right scale) three-year yields (Source: Reuters)

Czech (green, left scale), Romanian (grey, right scale), and Hungarian (red, right scale) three-year yields (Source: Reuters)

The last graph shows that the foreign exchange is also affected. There are countries where they pay attention not to overheat the economy and the state (monetary authority) takes responsibility to soften the recovery-collapse cycles. In this case, the country is the Czech Republic. There are places where it is less important, but since there are foreign currency borrowers, they cannot allow their own currency to weaken. So, the market forces the government (monetary authority) to follow a more responsible mentality. This is Romania.

And there is Hungary, where the central bank is not worried about its currency weakening, but becoming stronger, so despite the accelerating nominal growth, it tries to keep interest rates low. This way (at short-term) the forint depreciates*

Koruna/forint (blue) and leu/forint exchange rate (the forint depreciates upwards) (Source: Reuters)

Koruna/forint (blue) and leu/forint exchange rate (the forint depreciates upwards) (Source: Reuters)

*Getting ahead of some of the criticism: this article is about the recent and short-term movements and their possible conclusions – it would be unwise to make long-term predictions based on them. However, this current phenomenon quite lines up with what we have been worrying about for the last one and a half years, and there is also the above-mentioned problem of dealing with the ‘next vs previous’ quarter’s developments.