Ezone Producer Price Inflation Leaps; Bank of England Defers Hiking its Bank Rate

November 4, 2021

The intensity of recent inflation has become an all-pervasive concern on numerous fronts.

A 2.7% monthly leap  in Euroland producer prices during September (led by a 7.7% increase in energy costs) lifted the 12-month rate of producer price inflation by 2.6 percentage points to 16.0%. The monthly and yearly comparisons were each the greatest in at least 26 years.

Dutch consumer prices catapulted 1.3% on month in October, raising year-on-year inflation to a 234-month high of 3.4%.

Fear of inflation particularly by the hard-strapped U.S. working class was an important factor behind the poor showing of Democrats in Tuesday’s election. Rightly or wrongly, President Biden is being held responsible for the persistent pandemic, the spike in inflation from supply-side shortages, the precautions needed to counter Covid, and the disruption to schools.

Forecasters had been divided over whether the Bank of England would today become the first major central bank to raise interest rates during the pandemic. That didn’t happen, but the votes to maintain existing policy settings were not unanimous. The Bank Rate has been 0.10% since a 15-basis point cut on March 19, 2020. Of the nine members serving on the BOE’s Monetary Policy Committee, Saunders and Ramsden voted to reverse that last cut and lift the rate back to 0.25%. Catherine Mann joined them in preferring to end the purchase of non-financial company investment-grade bonds whose limit has been GBP 20 billion and thus lower to holding of total assets back to GBP 875 billion. Today’s Bank of England policy statement summary reaffirms the continuing appropriateness of the current stance, retains forward guidance pointing to a likely bank rate of 1.0% a little more than a year from now, and lays out the following baseline view regarding inflation:

The upward pressure on CPI inflation is expected to dissipate over time, as supply disruption eases, global demand rebalances, and energy prices stop rising. As a result, CPI inflation is projected to fall back materially from the second half of next year. Conditioned on the market-implied path for Bank Rate and the MPC’s current forecasting convention for future energy prices, CPI inflation is projected to be a little above the 2% target in two years’ time and just below the target at the end of the forecast period.

Meanwhile, a bunch of additional purchasing manager surveys for October released today provide further evidence of supply chain bottlenecks lengthening order backlogs, boosting inflation, and dampening growth.

Euroland’s services and composite PMI indices were revised marginally lower than preliminary indications to six-month lows of 54.6 and 54.2. The German composite PMI of 52.0 was over ten points below its spring high and at an 8-month low, while the French, Italian and Spanish composite readings of 54.7, 54.2, and 56.2 each constitute six-month lows.

Japan’s unrevised composite and service-sector PMI scores (each coincidentally at 50.7) represent 6- and 21-month highs.

The British construction purchasing managers index rebouned above September’s 8-month low to a two-month  high of 54.6.

The IHS-compiled South African private purchasing managers index printed below the 50 threshold between improvement and deterioration for the third time in four months and, at 48.6, only surpassed July’s 46.1 reading among surveys taken in the past year.

In financial market action overnight,

  • The dollar rose 0.4% on a weighted basis and by 0.8% against the Turkish lira, 0.5% relative to the euro, kiwi, and Aussie dollar, and 0.3% vis-a-vis the loonie, Swissie, and sterling. The yen outdistanced the dollar by 0.1%.
  • Stock markets in Asia closed up 0.9% in Japan, 0.8% in Hong Kong and China, and 0.5% in Indonesia. European share prices have also strengthened. U.S. stock market gains have been limited primarily to the tech companies, which are particularly sensitive to interest rate movement.
  • Ten-year U.S. Treasury and British gilt yields are three basis points lower, and the 10-year German bund yield is down two bps.
  • Prices for WTI oil and Comex gold are up 1.6% and 1.0%.

German factory orders had plunged 8.8% in August and recovered by a smaller-than-forecast 1.3% in September as demand for both consumer and intermediate products slipped further. On-year growth in orders, which had slightly exceeded 25% in June and July, slowed from 11.7% in August to 9.7% in September.

British car registrations posted a fourth straight year-on-year decline, and the drop of 24.6% was the most for an October in 30 years. Supply chain delays have hit global automakers very severely.

A string of monthly contractions in Australian retail sales of -1.8% in June, -2.7% in July and and -1.7% in August was broken by a 1.3% rise in September.

Swiss consumer confidence fell back to a reading of 3.8 this quarter from more than a ten-year high of 7.7 during the third quarter.

Canada recorded a C$ 1.86 billion trade surplus in September, 23% wider than in the prior month.

In Thailand, consumer sentiment rose to a 5-month high in October.

Norway’s central bank policy rate was retained at 0.25% after this month’s review following a 25-basis point hike in September. In three, incremental moves from March through May of last year, the rate had been slashed to zero percent from 1.5%. A released statement from the Monetary Policy and Financial Stability of the Norges Bank indicates that today’s action was decided unanimously, a second rate increase is likely next week, and so is a gradual further rise in the rate to 1% a little more than a year from now. The statement observes considerable ” uncertainty as to the evolution of the pandemic and its impact on the Norwegian economy.”

Today’s array of released U.S. economic statistics showed

  • A somewhat greater-than-forecast 14k drop last week in new jobless insurance claims to 269k.
  • An $8.1 billion additional month-on-month widening of the goods and services trade deficit to a record $80.934 billion. The goods deficit climbed to $98.2 billion as exports plunged 4.7%, and imports rose 0.8%.
  • Productivity plunged 5.0% last quarter, most since the second quarter of 1981, which happened just before the onset of a severe recession. Compared to a year earlier, productivity fell 0.5%, its largest drop in ten years.
  • Unit labor costs accelerated to an 8.3% quarterly rise last quarter from 1.1% in 2Q and were 4.8% above their year-earlier level.

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


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