It is widely recognised that current low global consumer price inflation reflects a temporary drag from weak commodity prices. Much commentary, however, asserts that “core” inflation is also unusually subdued. Not so.

The first chart below shows headline and core inflation aggregates for the G7 countries and seven large emerging economies (the “E7”). The core definition varies slightly across countries but in most cases excludes all food and energy items*. The country data were aggregated using GDP weights.

G7 plus E7 headline CPI inflation was 1.7% in September, equal to a low reached in January and the least since October 2009. Core inflation, by contrast, rose to 2.7%, the highest since September 2008.

The elevated core rate mainly reflects E7 strength – second chart. The E7 aggregate has been driven up by surges in core inflation in Russia and Brazil, caused by currency collapses – current core rates are 9.1% and 16.6% respectively. In addition, however, G7 core inflation has been drifting higher and is slightly above its average over the past 10 years – 1.5% versus 1.4%.

Lower commodity input costs and cheaper manufactured imports from weak-currency emerging economies have been pulling down on the G7 core rate, so the observed rise indicates a pick-up in domestic inflationary pressures. G7 labour markets are now relatively tight, with the unemployment rate down by a further 0.6 percentage points to 5.8% over the past 12 months – equal to its level in mid-2006 when G7 core inflation was also rising.

With monetary trends suggesting improving global and E7 economic prospects, commodity prices and E7 currencies may stabilise or recover.  If so, G7 core inflation is likely to continue to move higher, while the E7 core rate should moderate as imported price rises slow.

*Japan: additionally excludes impact of 2014 sales tax rise. Brazil: includes some food items. India: includes vehicle fuel, excludes additional items. Russia: includes some food items, excludes additional items.