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
• •
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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Macro Week kly – Inflation is s turning up – 21 October 20 16
Energy price e inflation to rise
Glo obal goods deflation d easin ng
% yoy (oil prices assumed to rema ain constant at US SD 50 to end 20177)
% yoy y
150 100
2 20
15 5
1 15
10 0
1 10 50
5
0
0
5 0 -5 5
-5 -50 -100
-10
-10 0
-15
-15 5
04 05 06 6 07 08 09 10 0 11 12 13 14 15 16 17 Brent oil prices (lhs)
99
Eurozone CP PI energy (rhs)
Source: S Thomson R Reuters Datastrea am, ABN AMRO Group G Economics
01
03 3
05
Global goo ods prices
07
09
11
13 3
15
China PPI manuffacturing
Sourc ce: Thomson Reutters Datastream, A ABN AMRO Group Economics
Turn in i commodity y prices and less over-cap pacity What explains the cchange in trend for Chinese manufacturedd goods prices s? One factor is the rise in ccommodity prices this year after the colla pse in 2014-2 2015. Secon nd, economic g growth in Chin na has also sliightly improveed. Finally, ove er-capacity has be een reduced in n a number off industrial sec ctors, so their downward pull on prices has ea ased. Not to oo sharp or s ustained Still, we w do not thinkk the uptrend in global inflattion will be tooo sharp or sustained. To start with, w energy prrices tend to have h relatively transient effeects on inflation. As the chart on o the left sho ows, oil prices will likely push up energy innflation over th he next few month hs, but the imp pact would ten nd to ease during the coursee of next year. In addition, there are a also some e restraining fa actors on the extent e of the aacceleration in n manuffactured good s prices. For instance, overrcapacity in a nnumber of China’s industtrial sectors ha as come down n but is a long way from beinng eliminated.. In additio on, global indu ustry and trade e growth look set to improvee, but are com ming from very depressed leve els. US is closest to fu ull employmen nt In add dition, there is still significant spare capac city more geneerally in many economies, which is depressing g domestic pric ce pressures. The US econoomy is probab bly the closes st economies tto full employm ment. The une employment raate has fallen to low levels. However, acccording to ma any estimates is not yet at thhe level to gen nerate strong g wage pressu ures. Indeed, wage w growth has h started to show some signs of life but rem mains modera ate. The unem mployment rate e has actually been flat over the last year, as a strong emp ployment grow wth has been matched m by rissing labour supply. With the lab bour force parrticipation rate e low and employees workinng part-time that want to work full-time, f there e may even be e a little more slack s in the la bour market than sugge ested by the lo ow level of the unemployment rate. Euroz zone and Jap pan facing low w underlying inflationary p pressures On the e other end off the spectrum m, eurozone un nemployment has come dow wn but still remain ns high. Wage e growth has actually a contin nued to trend ddown, possibly y also
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Macro Week kly – Inflation is s turning up – 21 October 20 16
reflectting depressed d inflation exp pectations, whiich are often a starting point for pay settlem ments. Eurozo one core inflation is low (at just 0.8%) andd has shown no n sign of moving higher. Mea anwhile, Japan n’s core inflatio on has been sslowing over re ecent month hs. It is now clo ose to zero an nd the country y risks renewedd deflation. Th he strength of the yen and weakk economic grrowth are the major m culprits.. Low core infflation in the eurozone and Japan
Fall in sterling to t push up U UK import pric ces
% yoy
% yoy y
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0
25 5
% yoy (reverse ( scale)
-30 -25 -20 -15 -10 -5 0 5 10 15
20 0 15 5 10 0 5 0 -5 5 -10 0 04
0 06
08 Japan
10
12
14
16
Eurozone
Source: S Thomson R Reuters Datastrea am, ABN AMRO Group G Economics
00
02
04 4
06
08
Import pricces ex-energy (lhs))
10
12
14 4
16
Sterling EER (rhs)
Sourc ce: Thomson Reutters Datastream, A ABN AMRO Group Economics
UK is a special cas se One country c standss out as an exc ception. UK inflation looks sset to rise sharply in the coming months. Bre exit risk has le ed to a sharp fall in sterling. This points to o a jump in importt prices, which h will eventually feed through into a picku p in core good ds price inflatio on. Taken toge ether with sign nificantly highe er energy price ces (also exace erbated by the falll in sterling ag gainst the dolla ar). These fac ctors should evventually push h UK CPI inflatio on to around 3 3%, which is well w above the BoE’s 2% targ rget for inflation over the mediu um term.
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Macro Week kly – Inflation is s turning up – 21 October 20 16
Ma ain economic c/financial forrecasts GDP P grow th (%)
2014
2015
2016e
2017e
Unitted States
2.4
2.6
1.5
1.9
United States S
Euro ozone
1.2
1.9
1.5
1.3
Eurozone
Japan
3M inte erbank rate
1 13/10/2016 20/10/20 016
+3M
2016e
+12M
0.88
0 0.88
0.8
0.80
1.20
2017e 1.4
-0.31
-0 0.31
-0.35
-0.35
-0.35
-0.35
-0.1
0.6
0.6
0.7
Japan
0.06
0 0.06
0.0
0.00
0.00
0.0
Unitted Kingdom
3.1
2.2
1.9
1.3
K United Kingdom
0.40
0 0.41
0.4
0.40
0.40
0.3
Chin na
7.3
6.9
6.5
6.0 1 13/10/2016 20/10/20 016
Worrld
3.4
3.2
2.9
3.2
Inflation (%)
2014
2015
2016e
2017e
+3M
2016e
+12M
2017e
Unitted States
1.6
0.1
1.4
1.9
US Trea asury
1.74
1.75
1.6
1.60
1.70
1.8
Euro ozone
0.4
0.0
0.3
1.5
German n Bund
0.04
0 0.01
-0.2
-0.20
0.00
0.1
Japan
2.7
0.8
-0.2
1.0
Euro sw w ap rate
0.42
0 0.40
0.4
0.35
0.60
0.6
Unitted Kingdom
1.5
0.0
0.5
2.3
Japane ese gov. bonds
-0.06
-0 0.06
0.0
0.00
0.00
0.0
Chin na
2.0
1.4
2.0
2.0
UK giltss
1.1 ↑
1.10 ↑
1.30 ↑
1.4
Worrld
3.5
2.9
3.1
3.2
Key y policy rate
20/10/2016
+3M
2016e
2017e
+3M
2016e
+12M
2017e
Fed deral Reserve
0.50
0.75
0.75
1.25
EUR/US SD
1.10
1.09
1.10
1.10
1.10
1.10
Euro opean Central Bank
-0.40
-0.40
-0.40
-0.40
USD/JP PY
103.7
04.0 10
103.0
103.0
108.0
Ban nk of Japan
-0.10
-0.10
-0.10
-0.20
GBP/US SD
1.22
1.22 ↓
Ban nk of England
0.25
0.25
0.25
0.25
EUR/GB BP
0.90
Peo ople's Bank of China
4.35
4.35
4.35
3.85
USD/CN NY
6.73
10Y intterest rate
ncies Curren
1.02
1.08 ↑
1 13/10/2016 20/10/20 016
1.25 ↓
1.25 ↓
0 0.89 ↑
0.88 ↑
6 6.74
6.80
110
1.30 ↓
1.33
0.88 ↑
0.85 ↑
0.83
6.80
6.95
7.00
Sou urce: Thomson Reutters Datastream, AB BN AMRO Group Ec onomics.
Min n economic/ffinancial forecasts Day
Date e
Time
Country
Perriod
Latest outcom me
Consensus
A ABN AMRO
Monday M M Monday M Monday M Monday M Monday M Monday M Monday M Monday
24/10/2 016 24/10/2 016 24/10/2 016 24/10/2 016 24/10/2 016 24/10/2 016 24/10/2 016 24/10/2 016
01:50:00 10:00:00 10:00:00 10:00:00 15:00:00 15:00:05 15:45:00 19:20:00
JP EC EC EC US US US US
se trade exports - % yoy y Merchandis PMI manuffacturing - index Composite e PMI output PMI service es - index Fed's Dudley US, Treasury Mark ket New York Fed's Bulla ard Monetary, Policy Arkansas A Markit - Fla ash PMI Fed's Evan ns, Chicago
Key Economic In ndicators and Events
Se ep Oc ct P Oc ct P Oc ct P
-9.6 52.6 52.6 52.2
-12.4 52.7 52.9 52.4
52.6 52.8 52.4
Oc ct P
51.5
51.5
Tuesday T T Tuesday T Tuesday T Tuesday T Tuesday
25/10/2 016 25/10/2 016 25/10/2 016 25/10/2 016 25/10/2 016
10:00:00 14:00:00 15:00:00 15:00:00 16:00:00
DE HU US US US
Ifo - busine ess climate - index Base rate -% FHFA hous se price index - % mo om S&P/Case Shiller house price index Conference e Board cons. confidence - index
O Oct Octt 25 Au ug Au ug O Oct
109.5 0.9 0.5 0.0 104.1
109.6 0.9 0.5 0.1 101.3
We ednesday
26/10/2 016
16:00:00
US
New home es sold - % mom
-1.4
Thursday T T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday
27/10/2 016 27/10/2 016 27/10/2 016 27/10/2 016 27/10/2 016 27/10/2 016 27/10/2 016
09:30:00 10:00:00 10:00:00 10:30:00 14:00:00 16:00:00
SE NO EC GB EC US US
Policy rate - % Policy rate - % M3 growth - % yoy GDP - % qo oq ECB's Now wotny speaks New durab ble goods orders - % mom Pending ho ome sales - % mom
Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday
28/10/2 016 28/10/2 016 28/10/2 016 28/10/2 016 28/10/2 016 28/10/2 016 28/10/2 016 28/10/2 016 28/10/2 016 28/10/2 016
01:30:00 01:30:00 06:30:00 07:30:00 09:30:00 11:00:00 12:30:00 14:00:00 14:30:00 16:00:00
JP JP NL FR EC EC RU DE US US
CPI - % yoy y Unemploym ment - % Producer confidence c manufactu uring - index GDP - % qo oq ECB's Coe eure speaks Economic sentiment monitor - index i Key rate % y CPI - % yoy GDP - % qo oq annualised Univ. of Mic chigan cons. confiden nce - index
109.5 0.6 100.0
Se ep
-7.6
Octt 27 Octt 27 Se ep 3Q QA
-0.5 0.5 5.1 0.7
5.1 0.3
0.3
Se p P Se ep
0.1 -2.4
0.0 1.2
0.0 1.5
Se ep Se ep O Oct 3Q QA
-0.5 3.1 3.4 -0.1
-0.5 3.1
O Oct Octt 28 Oc ct P 3Q QA Oc ct F
104.9 10.0 0.7 1.4 87.9
104.8 10.0 0.8 2.4 89.1
Sou urce: Bloomb erg, Reu uters, ABN AMRO Gro oup Economics (we provide p own forecasts s only for selected ke ey variab les and eve nts)
-0.5 0.5
3.7 0.3 104.7 0.9 2.2 88.0