Inflation Set to Fall Below Central-Bank Targets, JPMorgan Says

Global inflation is poised to fall below central-bank targets for the first time since 2010, providing fuel for increased consumer spending and room for monetary stimulus, according to JPMorgan Chase & Co.

0f 26 central banks the firm monitors that have inflation targets, prices will decline below them at 23 by year-end, Joseph Lupton and David Hensley, New York-based economists, wrote in a note June 29. Global consumer price inflation may slide to 2.1 percent by the end of 2012, half a percentage point lower than the average central-bank target, they wrote. The drop in oil prices may accelerate the decline, they wrote.

“The purchasing-power lift is an important cushion to weakening elsewhere,” Lupton said in a phone interview. “It provides a cushion not only to the real purchasing power of labor income, but it also increases the purchasing power of stock market gains. I don’t think it’s something that’s going to completely offset the softening in the labor market in the U.S.”

Crude oil for August delivery dropped 27 percent from May 1, when it closed at $106.16 a barrel in New York, to June 28. It traded yesterday at $83.66, down 1.5 percent.

Inflation-linked global government bonds lost 0.82 percent last month, the most since November 2010, according to a Bank of America Merrill Lynch bond index.

“With inflation finally moving back below targets, central banks are likely to shift their attention more fully to the increase in downside growth risks in recent months,” the JPMorgan economists wrote. “This is most clear in the emerging markets.”

The economists wrote that they used a “top-down global model” of headline inflation designed to gauge the impact of commodity prices on inflation.

Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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