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So Long, Disinflation, as JPMorgan Sees Global Prices Rising

The era of slowing global inflation looks to be over.

Three years of worldwide disinflation is ending, in the eyes of economists at JPMorgan Chase & Co. Their estimates show global consumer prices accelerated 2.65 percent in May.

That’s the fastest pace since April 2012 and the level they’d targeted for the end of 2014. It marks a 0.6 percentage point jump since February, when the 2 percent rate was the lowest since November 2009.

It’s not just food and energy costs. Inflation excluding those more volatile measures was still 2.1 percent in May. The hunch at the biggest U.S. bank is that companies are regaining pricing power as manufacturing strengthens, said David Hensley, an international economist at JPMorgan in New York.

The analysis may surprise those investors who spent the year pushing up bond prices. It may also grate on economists such as Nobel laureate Paul Krugman, who yesterday bemoaned “inflation hysteria” on Wall Street.

“We definitely have seen the turn,” said Hensley in an interview. “It would be an abrupt swing to go to worrying about the inflationary upside, but we may be seeing that shift taking place.”

Like JPMorgan, Societe Generale SA economist Aneta Merkowska told clients last week to “prepare for the return of U.S. inflation.”

Yellen Challenge

She predicts Federal Reserve Chair Janet Yellen will face consumer-price gains outside of food and energy of 2.3 percent by the end of the year. Import prices are bottoming, slack is eroding and housing and health-care costs are bouncing, she wrote in a report.

That could put the Fed behind the inflation curve, she said. Waiting to the middle of next year to raise their benchmark rate -- as markets and officials have indicated is likely -- would spell an unusually late start to tightening given the core rate may exceed 2.5 percent by then.

The Fed raised rates in 2004 and 1999 when inflation was closer to 2 percent, said Merkowska, who predicts the Fed funds rate will be at 2.5 percent by the end of 2016, higher than the market bets.

Krugman’s hysteria accusation is hyperbolic itself given investor measures of inflation expectations do not suggest panic about prices, according to Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.

While faster wage growth has yet to materialize in the U.S., unemployment has fallen quicker than expected, banks are boosting lending and rents and medical care are becoming costlier, he told clients in a report yesterday.

“In the investment business it is much better to be prepared than surprised,” said Dutta.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net Andrew Atkinson

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