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Inflation - Global Economics Weekly Brief

Inflation and the
Global Economics Weekly Brief

The big news last week was inflation. In the UK, higher food-price inflation cancelled out lower air fares, keeping inflation well above target and continually rising. Food prices also pulled Eurozone inflation up to its highest level since December 2008 and rising rapidly each month. In the US, headline inflation reached its highest level since October 2008 with more prices rises on the way each month. China did not escape either. Non-food inflation reached its highest level on record, and prompted the authorities to tighten policy again. Earlier this year, China’s Premier, Wen Jiabao, remarked that “inflation is like a tiger, once it gets free, it is difficult to put back in its cage.” With further food price rises likely, he might be right. Food and fuel prices will continue to rise each month for several months!

UK inflation held steady in May but looks set to rise again from June 2011. The CPI was unchanged at 4.5%y/y in May. April’s rise in air fares was partly reversed but food took over. Food price inflation rose to 5.3%y/y in May from 3.7%y/y in April. Risks to inflation are skewed to the upside. It was recently announced that utility prices will rise later this year, while the recent drought extending across much of the south east of England and Europe is likely to push food prices higher. Rapid rises in food, fuel and energy will continue every month for some time into 2012 and possible beyond.

Good news for the UK labour market. The number of unemployed fell by 88,000 to 2.43 million in the three months to April – the lowest level in two years. Over the past year employment is up by almost 400,000 many positions are part-time). 520,000 jobs were created in the private sector, outweighing a fall in public sector employment of 143,000, suggesting resilience in the private sector in the face of public sector job contraction. Even better news is that 80% of the jobs created in the last quarter were full-time. How many jobs were for British born?

UK wage growth was even weaker in April. The growth rate in underlying wages fell to 2%y/y in the three months to April from an already very weak 2.1%y/y. Wages are simply not keeping up with inflation, so there is no evidence of a wage-price spiral taking hold. This gives backing to the MPC’s current stance of holding rates at a record low.

UK shoppers stay away in May. A likely consequence of weak wage growth is poor retail sales and right on cue retail sales fell by 1.4%m/m in May. Food led the way, although sales were weak across the board. The extent of the decline lends some support reinforces to feedback from retailers that consumers are cutting back in response to rising fuel prices, uncertainty over job prospects and weak wage growth. No doubt the retail sector is struggling, although it is worth noting sales are 3.8% higher compared to last year. Other sectors are still in decline, manufacturing and house building.

Eurozone inflation fell marginally, but this is unlikely to deter the ECB from raising rates. Eurozone inflation fell for the first time in nine months from 2.8%y/y in May to 2.7%y/y in April as energy inflation retreated. But, just like the UK, food price inflation rose, in the Eurozone’s case to the highest level since December 2008. Although the core rate of inflation, which excludes the volatile categories of food and energy, fell to 1.7%y/y from 1.8%y/y, it’s unlikely this will be enough to dissuade the ECB from showing “strong vigilance” and hiking rates in July.

US inflation reached its highest level since October 2008. The headline CPI rose to 3.6%y/y in May from 3.2%y/y in April. Even after stripping out food and energy costs, May's core inflation level showed the largest increase since July 2008, rising 0.3%, to sit at 1.5%y/y. This was due to higher car prices, which was caused by a shortage of new and used cars. Clothing prices also moved higher as producers passed on higher cotton prices to shoppers. More rises to come every month for some time!

US industrial production rose by just 0.1% m/m in May. The warmer weather reduced utility production while supply chain disruptions from Japan dragged auto production down too. But, excluding these two categories, the figures were more upbeat, showing a 0.6%m/m rise after a 0.1%m/m drop in April. While supply chains are expected to repair in the coming months, the drop last week in both the Empire Manufacturing and Philly Fed, two regional U.S. manufacturing surveys, suggests the softness in manufacturing may be more widespread than just the auto industry.

Chinese inflation continues to move higher but growth remains robust. China’s inflation moved up to 5.5%y/y in May from 5.3%y/y in April. However, more concerning was the rise in non-food inflation to 2.9%y/y, the highest level on record. In response, the authorities raised the proportion of deposits banks must set aside rather than lend for the sixth time this year in an effort to cool loan growth and thus inflation. Activity indicators continued to slow, but they remain robust, which suggests a hard-landing is still unlikely. Growth in fixed investment, which has overwhelmingly been the main driver of growth post-crisis, actually accelerated.

Greece - Why a Greek tragedy matters to you!

Rioting on the streets of Athens may seem remote but Greece`s financial meltdown could/will engulf all in Europe. The banks again globally will be in trouble `big-time`! Rioting could happen in `every` European country if the public sector do not accept the new financial measurements arrangement in `every` European state!

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This was your report on inflation from the Global Economics Weekly Brief.

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