Data Mix of Elevated Inflation Despite Moderating Growth

October 12, 2021

Today’s menu of price data around the world revealed

  • The highest rate of Japanese domestic producer price inflation (6.3%) since September 2008 and also a larger 31.3% year-on-year leap in import prices.
  • The steepest on-year jump in German wholesale prices (13.2%) since June 1974. As then, energy played a prominent role in the spike. The 12-month increase in solid fuel and mineral oil product prices accelerated to 41.9% from 35.5% in the prior month.
  • CPI inflation in Serbia advanced 1.4 percentage points to 5.7% in September, most since August 2013.
  • Romanian CPI inflation last month of 6.3% was its highest since June 2011.

Inflation has not been correlated with excessive money demand. Japanese bank lending in August-September was only 0.6% greater than a year earlier, and loans slowed from 6.2% in the first quarter of 2021 to 3.0% in 2Q and 0.7% in 1Q.

Nor has higher inflation been accompanied by rising growth momentum. Among data reported today,

  • U.S. small business sentiment dropped to a six-month low in September.
  • Chinese motor vehicle sales were 19.6% fewer in September than a year earlier. That was the fifth 0n-year drop in a row and the greatest decline in that sequence.
  • The German ZEW expectations index, a gauge of economic sentiment,, dropped to a 19-month low in October, that is the level in the earliest stages of the pandemic. Perceived current conditions fell to a 4-month low. The ZEW expectations index for the whole euro area also slid to a 19-month low, with current conditions dipping to a 2-month low.
  • September same-store sales in the U.K. posted their first year-on-year decline (0.6%) since March 2020.
  • Although British unemployment fell to a one-year low of 4.5%, average wage earnings decelerated to a 4-month low.
  • The on-year 5.2% rise in Mexican industrial production in August was the smallest increase in five months.
  • Malaysian retail sales and industrial production in August were 7.5% and 0.7% lower than a year earlier.
  • The NAB Australian business conditions index fell to a reading of +5 in September from 14 in August and 37 back in April despite improved business confidence caused by loosened Covid containment restrictions.

Turkish retail sales and industrial production increased in August but remained subdued relative to first-half data. Retail sales went up 0.3% on month and showed greater on-year growth (15.0%) after a 5-month low of 13.2% in July. Output rebounded 5.4% on month from a 3.4% decline in July; a 13.8% on-year increase was well below April’s 66.3% advance.

America’s inflation problem in the 1970s was associated with dollar weakness. Selling pressure sapped the Nixon administration’s commitment to defending fixed dollar parities, and the early days of flexible market-driven dollar movement were a period when the dollar fell most of the time and often in a disorderly way. While market chatter has lately been focused on concern about a new age of stagflation, the dollar this time has been quite resilient.

The dollar overnight was unchanged against its weighted DXY index and remains near to its 52-week peak. Individual dollar movements overnight included 0.1% upticks against the yen, euro, and Swiss franc (three hard currencies that capitalized on the dollar’s weakness in the 1970s) but downticks of 0.5% versus the Australian dollar, 0.4% relative to the kiwi, 0.3% vis-a-vis the peso and sterling, and 0.2% against the loonie.

Prices for oil and gold firmed 0.3% and 0.4% so far today.

Asian stock market action was weak, with broad indices closing down 1.4% in Hong Kong and South Korea, 1.3% in China, 1.1% in Taiwan and 0.9% in Japan. European markets are now but not quite so much, with losses ranging between 0.3% in Spain to 0.6% in France. U.S. futures were modestly in the black shortly before today’s open.

The ten-year U.S. Treasury yield dipped a basis point below yesterday’s 4-month high of 1.61%.

In central banking news, the Bank of Korea’s base rate, which had been raised at the meeting in August for the first time since November 2018, was left unchanged at 0.75%, but a hint was made that a second increase is likely soon: “The Board will appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above 2% for some time, despite ongoing uncertainties over the virus.” At 0.75%, the base rate is a full percentage point below its prior high. During 2020, the rate was cut twice between March and May by a total of 75 basis points.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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