Less Confidence About Where Inflation May Be Headed

January 13, 2023

Financial market participants are grasping for every straw about inflation the way they once did regarding news about the Covid-19 pandemic. Because there is so much uncertainty regarding each, wide daily and intra-day swings have become common, as each incremental piece of news tips sentiment. In the short first two weeks of 2022, one story projected that U.S. inflation might be headed to near- or sub-zero territory, while a subsequent piece dealing with structural changes like permanently lower labor participation, lessening outsourcing to China and the Russian-Ukraine war’s effect on energy, has Fed officials wondering if the definition of realistic price stability ought to be raised from 2.0%.

Today’s big inflation surprise was dealt by the U.S. import price data, which in contrast to other recent inflation figures, revealed a higher-than-projected price rise in December, and the deviation from analyst expectations was a significant one. Import prices had been expected to post a sixth consecutive monthly decline but instead rose 0.4% and lifted the 12-month rate of increase from 2.7% in November to 3.5% last month. In light of a 10.7% drop of the DXY dollar index from its late 2022 peak, maybe this figure shouldn’t have been so unexpected.

In overnight action, however, the dollar climbed 0.8% against the Japanese yen and New Zealand dollar, 0.6% relative to the Australian dollar, 0.5% versus the euro and loonie, and 0.3% vis-a-vis sterling and the Mexican peso.

Ten-year sovereign debt yields fell three and two basis points in Germany and Great Britain, but rebounded two basis points in the United States.

Asian stock markets extended the week’s rally, but U.S. share prices reacted poorly after the release of U.S. bank quarterly earnings and forward guidance that embodied recessionary expectations. European stocks are in the black.

The prices of WTI oil and gold are down so far today by 0.5% and 0.2%, but that of Bitcoin has risen another 0.4% and is 20% above last November’s low.

In other price news today,

  • U.S. export prices tumbled 2.6% last month, depressing the year-on-year pace to a 23-month low of 5.0%.
  • Double-digit CPI inflation was reported in Hungary (a 320-month high of 24.5%), Slovakia (a 270-month peak of 15.4%), Sweden (a 382-month high of 12.3%), Poland (16.6%), Botswana (12.4%), and Angola (13.9%).
  • Finnish CPI inflation held steady last month at November’s four-decade high of 9.1%.
  • French CPI inflation was unrevised from the preliminary estimate for December of 5.9%, which is twice the 2.8% pace a year earlier. Core CPI inflation in France also exceeded 5% at 5.3%.
  • Consumer price inflation in Spain of 5.7% was a full percentage point lowr than in November and down from an 8-month high of 10.8% in July. But core inflation there was at a 3-decade high.

Several British economic indicators were released today, including industrial production which has fallen month-on-month throughout 2022 including a dip of 0.2% in November. Factory output fell 0.5%, and construction was flat. Industrial production also recorded a bigger year-on-year slide of 5.1%. This bearish report was amplified by the monthly GDP data series that ticked just 0.1% higher in November and fell by 0.3% in September-November. Britain’s merchandise trade deficit widened over GBP 3 billion to GBP 15.623 billion in November, which resulted in the goods and services trade balance swinging from a surplus of GBP 1.498 billion in October to a deficit of GBP 1.802 billion in the ensuing month.

Euroland reported its smallest seasonally adjusted trade deficit in 9 months. The shortfall of EUR 15.2 billion resulted mainly from weakening imports, which fell 3.8% on top of monthly drops of 3.3% in October and 1.9% in September. The non-adjusted trade deficit was EUR 11.7 billion, bringing the year-to-November deficit to EUR 305 billion. In January-November of 2021, Euroland had experienced a trade surplus of EUR 125 billion. The deterioration in 2022 reflected the net energy import bill that widened from EUR 248 billion to EUR 600 billion.

Euro area industrial production was also released today. The output bounce of 1.0% after October’s drop of 1.9% was concentrated in the smaller economies that use the euro. Industrial production fell on month by 0.7% in Spain and 0.3% in Italy and rose just 0.6% in Germany. Only in France (2.6%) among the four largest economies was there a decent-sized rise in industrial production, which for the whole currency bloc was only 2.0% greater than in November 2021.

Considering the headwinds that developed from Covid and then the Ukraine war, German real GDP managed to rise by a decent 1.9% in 2022 (2.0% when adjusted for the different number of business days compared to 2021). The GDP growth rate followed expansion of 2.6% in 2021 and a contraction of 3.7% in 2020 and left the economy’s size 0.7% above its 2019 level. Growth in 2022 was led by personal consumption (+4.6%) and business investment in machinery and equipment (2.5%); net foreign demand exerted a 1.3 percentage point drag on GDP growth.

On the central banking front,

The Central Reserve Bank of Peru‘s policy interest rate has been increased by 25 basis pints to 7.75%. That matches the incremental rise of the previous four tightenings, which were preceded by a dozen straight hikes of 50 bps and an initial 25-bp increase in August 2021. At 7.75%, the new rate level still 70 basis points shy of Peru’s current inflation rate. Central bank officials define price stability in a range of 1-3%.

The Bank of Korea‘s policy interest rate was also raised by 25 basis points. The new 3.5% level compares 0.5%, where the rate had been from May 2020 until August 2021. “Inflation still remains high and is projected to be above the target level for a considerable time, although the domestic economic growth rate is expected to be below the November forecast,” according to a released statement. Officials left the door open to possible additional tightening without explicitly saying such would be necessary.

The National Bank of Kazakhstan‘s policy rate of 16.75% since December was left unchanged at that level. There were six hikes totaling seven percentage points made during 2022, but consumer price inflation of 20.3% still exceeds the policy interest rate level and is the highest such has been during the 21st century.

Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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