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Central bank balance sheet growth has not led to sustained inflation levels in-line with developed market central bank targets.


In a prior post, we discussed some of the monetary and fiscal policy tools that have been implemented in Japan and Europe and how they have not been able to generate the inflation levels targeted by their respective central banks.  Alhambra Investments put together the graphs below showing the increase in the size of the balance sheets for the Bank of Japan (BoJ) and the European Central Bank (ECB) and their corresponding inflation growth rates.

Source: Alhambra Investments.

Source: Alhambra Investments.

The balance sheets of both countries have grown to record levels and the ECB even announced a new increase to their existing policies.  At the same time, the Eurozone reported -0.30% year-over-year (y/y) Consumer Price Inflation (CPI) growth in October (the third consecutive month of negative year of year growth) and 0.20% y/y growth in Core CPI, tied with the prior month for an all-time low. 

Source: FRED.

 Source: FRED.

Japan reported -0.40% y/y CPI growth in October, the lowest level since September 2016.  Core CPI in Japan declined -0.30%, the lowest level since May 2013. 

Source: FRED.

Source: FRED.

So far, the trend is still intact of central bank asset growth not leading to inflation staying at central bank target levels.  

Alhambra Investments also had a chart showing that central bank asset growth has not led to inflation staying at the targeted levels in the U.S.

Source: Alhambra Investments.

The U.S. reported CPI growth of 1.2% y/y in November. Excluding the pandemic months of 2020, this would have been the lowest level since August 2016.  Core CPI increased by 1.65% y/y in November. Excluding the pandemic months of 2020, this would have been the lowest level since February 2014.

Source: FRED.

Source: FRED.

We noted in the prior post that one of the issues holding back inflation is the lack of credit growth and bank lending that has been taking place over the last decade.  These trends have been continuing in 2020.  The New York Federal Reserve updated their Consumer Credit Report and it showed that revolving credit (credit cards) continues to decline at a significant rate.

Source: Hedgeye.

Alhambra analyzed the trends in consumer credit and noted that the vast majority of consumer credit growth since 2008 has come from government issued student loans.  Based on their analysis, when excluding student loans, consumer credit is only 13% higher than the peak of 2008.

Source: Alhambra Investments.

Source: Alhambra Investments.

The latest NFIB Small Business survey showed a noticeable decline in the satisfaction level of borrowing needs, suggesting that small business owners are more concerned about their ability to access credit.

Source: Rosenberg Research.

Commercial and Industrial loans (bank loans for large and medium sized companies) increased in early 2020 as companies accessed lines of credit at the beginning of the pandemic but have been declining month-to-month (m/m) since June.  This data set had been declining m/m from September 2019 until February 2020. 

Source: FRED.

If lending and credit continue to decline in 2021, it is unlikely that inflation levels are going to stay at or above central bank targeted levels for a sustained period of time.  This has been the case since their balance sheets started to grow over twelve years.

 

Rank Dawson, CFA
Vice President, Research and Strategy

Boyd Watterson Asset Management, LLC

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.