Scared of inflation? Try deflation

Is there something wrong with this picture or what?

Wall Street remains on a seesaw ride and volatility - compared with the VIX index's performance over the past three years - is through the roof. Theoretically, ex-US investors needn't be losing sleep over "signs" - repeat "signs" - of rising inflation in America and, with it rising bond prices, and a more aggressive Fed. Of course, it's purely theoretical for we all know that what happens on Wall Street does not remain on Wall Street. When the US sneezes, the world catches a cold.

The wrong picture is that the butcher, the baker and the candlestick maker ... instead of ruing this "awful developments" should be dancing on the streets and singing hallelujah for the latest indications only demonstrate that the US central bank is well on its way to achieving its goal of normalising monetary policy ever since it first raised the fed funds rate from the record low 0.25% to 0.50% back in December 2015.

The succeeding rate lifts in December 2016 and over the course of 2017 - a total of 1.0% increase -- along with the shrinking its balance sheet (started in October last year, is anything but good news. After so many years of running an abnormal monetary policy, it's getting back to normality ... because growth has become sustainable and strengthening and inflation moving up towards its target.

Never mind what I scribbled but the insights, outlook and decisions made by four world central banks that met last week underscore that the world is in a better place, all against the backdrop of the turmoil on Wall Street.

While the central banks of Australia, India and New Zealand all kept their respective monetary policies on hold, they sang from the same hymn book - that of a strong and strengthening global economy and this rising tide would float their own boats.

The Bank of England (BOE) also kept policy unchanged - voting unanimously to maintain the Bank Rate at 0.50% (which it lifted by 25 bps last November) and the quantitative easing ceilings for gilts and corporate bonds remain at £435 billion and £10 billion, respectively.

Needless to say, the BOE is operating under a different environment. UK inflation is running higher than the BOE's 2.0% target:

"CPI inflation fell from 3.1% in November to 3.0% in December. Inflation is expected to remain around 3% in the short term, reflecting recent higher oil prices. More generally, sustained above-target inflation remains almost entirely due to the effects of higher import prices following sterling's past depreciation. These external forces slowly dissipate over the forecast..."

Still, because of relatively stronger GDP growth - revised up to 1.7% in 2018 (from 1.5% in the November 2017 Quarterly Inflation Report) and 1.8% in 2019 (from 1.7%) - "domestic inflationary pressures are expected to rise. The firming of shorter-term measures of wage growth in recent quarters, and a range of survey indicators that suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates."

Leading to the BOE's updated forward guidance that, "The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target".

The point is global growth dynamics haven't change between the start of the year and Wall Street's wailing in February. Inflation direction may have, but isn't this what central banks have been trying to achieve with their abnormal monetary policies for many, many, many years now?

If indications of rising inflation (to central bank targets) are getting you down, try to imagine the un-wonderful worse world of deflation.

We've recently been there in 2008 and 2009.  Didn't feel good, did it?

Read more: Wall StreetBOEFedQuarterly Inflation ReportAustraliaBank of EnglandCPIIndiaNew ZealandUKVIX
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