While these forecast central bank actions are the proximate driver of bond yields, central banks are only responding to the economic environment. Macro factors must be behind low inflation and the lack of growth vigour.
An insufficient explanation is the decline in inflationary expectations in some countries, including the US and Australia. Certainly the decline will worry central banks. The reality, however, is that inflation expectations have been led lower by inflation disappointing on the downside.
So while lower expectations suggest low inflation is becoming entrenched, it is not the primary driver. There are a range of forces likely playing a role and not all easy to quantify or forecast.
Importantly, the credit side of many economies has been impaired post-crisis. In the US, for instance, the St Louis Fed’s estimate of the velocity of money continued to decline until 2017, and has only risen very modestly since then.
Most central banks give money growth indicators little attention because their relationship with macro variables has not been particularly stable over past decades. This is true. But their replacement, the Philips Curve and related labour market and activity indicators, don’t have as stable a relationship with inflation as was presumed either.
When the provision of credit is impaired, either through global regulation (Basel III), stress tests (the US), or macro-prudential policy (Singapore, South Korea, Australia, NZ and other economies), then in ANZ Research’s view, separately monitoring the money side of the economy has direct policy relevance.
Technology also continues to play an important role in the low inflation of recent years, even if quantifying its effect is difficult. This impact can manifest itself directly through a smaller requirement for physical capital, facilitating new entrants into market segments, directly raising price transparency, as well as shifting the mix of demanded skills in the labour market.
One example of the increasing role of technology relates to global trade in services. Services now account for 24 per cent of global trade, a record high. The nature of services trade has also changed fundamentally in recent decades.
Until 1990 travel and transportation accounted for more than half of services trade. That has now fallen to 42 per cent according to the latest data. On current trends, trade in business services is likely to eclipse travel as the largest component of services trade, after passing transport in 2011, with other sectors also growing strongly.
This increased international competition in the services sector substantially broadens the price tension in modern economies beyond agriculture and manufacturing.
Another feature of the landscape – commodities - has a technology component as well. Oil prices are the single largest driver of shifts in headline inflation for advanced economies. In the period before the global financial crisis oil prices had surged between 20 per cent and 50 per cent year on year for long periods. This is a rate consistent with G7 headline inflation of between 2 per cent and 3 per cent.