Another upside surprise to US inflation in January, headline CPI hitting 7.5% y/y (mkt 7.3%) from 7.0% in December. Core meanwhile rose to 6.0% y/y from 5.5% (mkt 5.9%). This is bad news for the Fed. Not simply because the level of inflation is so far beyond the target, they still have base effects to lean on later in the year which will draw the headline rate lower. Indeed, we’re pretty close, if not at, the peak of the actual headline readings. The worry is the breadth of the pressure we are now seeing.
March surprised mildly to the upside of consensus expectations, headline CPI hitting 2.6% yoy following a 0.6% mom increase. The main driver was the transport component (i.e. gasoline prices). These went from a net drag of -0.39%pts last year to a +0.96%pt driver of the yoy rate this time round, so a net swing of 1.35%pts, or half of overall yoy CPI rate.
While some of the Chinese activity indicators might have perked up, there is no hiding from the disinflationary pressure stalking China’s economy. April CPI dropped back to 3.3% yoy (4.3% in March) while PPI sunk to -3.1% from -1.5% in the previous month. And the problem would be even worse were it not for persistent food price pressures as the impact of the earlier swine flue epidemic continues to pressure meat prices. Indeed, CPI ex-food is now running at just 0.6%.
Disinflation resumed in December with consumer prices surprising to the downside. Headline and core both registered a 1.3% y/y gain, a decline from 1.5% and 1.7% respectively in November. In constant tax terms the decline was a little faster. On the producer price side there is scant evidence of any inflationary pressure. Although headline output prices edged up, core output prices - which are more closely correlated with CPI - ticked a little lower.
The strong upswing in Chinese consumer price inflation in November has a very straightforward explanation. The swine flu epidemic and the devastation this has inflicted on Chinese pig herds – reducing total numbers by over 40%. Indeed, meat prices are up 74% yoy, driven by pork which is now up 110% compared to the same period last year.
Solid August retail sales report which build on the improvement we saw during July. Overall retail sales growth has moved up to 4.1% y/y while control group growth hit 5.3% y/y. Much of the monthly lift was due to higher auto sales, stripping that out and the recent growth rate looks more modest. But overall this is not a sign of false confidence with an increase in big ticket expenditure a positive demand sign.
Slight upside surprise in June core consumer prices as headline y/y moved down amid the base effect. The breakdown shows a further uptick in housing costs (shelter) while there has also been some upward movement in household furnishings and apparel (which was slightly less deflationary), perhaps reflecting tariff effects.
Consumer prices remained steady in June with prices actually falling m/m, which kept the y/y rate at 2.7%. The backdrop would have been more encouraging had swine flu not taken its toll on meat prices while fresh fruit and vegetables have also soared over the past few months.
Slight downside surprise versus market expectations but really nothing too unexpected. The underlying inflation story remains moderate short-term disinflation. There is not much sign the initial raft of tariffs have had much of an effect on consumers, with goods prices a little easier.