Macro Weekly
Group Economics
21 October 2016
Inflation is turning up • Nick Kounis Head Macro & Financial Markets Research
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Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
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Global inflation has started to move higher and will likely rise further in the next few months Energy price inflation will go from being negative to being positive, while global manufactured goods price deflation has faded Still there are reasons to think that the rise will be not be too sharp or sustained Economic growth, while improving, is still lacklustre, while spare capacity around the world is keeping a lid on domestic price pressures
Global inflation is on the up Inflation has started to rise globally over the last few months. This followed a significant downward trend since the middle of 2011, which flattened out at the end of 2014. Since then it had been moving broadly sideways. Eurozone inflation was at +0.4% yoy in September, up gradually from the low point of the year of -0.2% yoy. US CPI inflation is up at 1.5% (low at 0.8% in July), while China’s CPI stood at 1.9%, compared to August’s low of 1.3%. So has inflation finally come to an inflection point? Will it rise more significantly in the coming months? Oil price drag is set to fade Headline inflation is set to accelerate further over the next few months. Most importantly, the drag from energy price inflation is set to fade. We expect oil prices to rise in the coming months. However, even if they were to remain flat at current levels (around USD 50), the year-over-year change in energy prices would go from being negative to being clearly positive. This will push the overall CPI across the major economies higher. This is illustrated in the chart to the left below. Industrial goods price deflation fading A second positive for global inflation is manufactured goods prices. They have been falling since the Autumn of 2014 (see chart below on the right). However, over the last few months, the pace of deflation has eased and there are indications it should end before long. In particular, China, often nicknamed ‘the world’s factory’, is an important driver of manufacturing activity and manufactured goods prices. Chinese producer prices stabilised in September, while they were falling sharply at the turn of the year. The output price index of the global manufacturing PMI has also been improving and also suggests deflation is dissipating.
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