India Inflation Surprises to the Upside Signaling That the Inflation Fight is not Over
Economic news and commentary for February 13, 2023
India CPI
India's CPI grew 0.5% MoM and 6.5% YoY in January, up from 5.7% YoY in December. The acceleration in inflation surpasses consensus estimates and jumps above the Reserve Bank of India’s forecast for FYQ4 of 5.7% YoY. The rise in food prices drove the headline figure higher as the annual pace of the food and beverage component grew from 4.6% YoY in December to 6.2% YoY in January. Other heavily weighted categories saw little to no deceleration in their annual paces. Fuel and light prices were up 10.8% YoY, slightly down from 11.0% YoY, housing prices were up 4.6% YoY, edging up from 4.5% YoY, and the general household goods and services category was up 7.3% YoY, a touch slower than the 7.4% YoY reported in December. At the moment, it doesn’t appear that the tightening put in place by the RBI has had a significant impact on demand in India. Both manufacturing and services sectors have been growing at solid paces despite weakness abroad, and most of the disinflation has been a result of the cooling of commodity prices, especially the decline in energy prices at the end of 2022. It is starting to look like the RBI might have to keep its foot on the gas on tightening, at least one or two more rate hikes, if it wants to discourage inflation from riding the upward side of the central bank’s target range. There are also rising inflation risks from a recovery in China which would increase the general level of aggregate global demand, likely having upward pressure on energy and food prices. This is just one of several CPI prints across the globe that has surprised to the upside, sending another message to central banks that the inflation fight is not over.
Still to come…
6:50 pm (EST) - Japan GDP
Morning Reading List
US
Banks Tighten Spigot, Consumer Credit Slows (Moody’s Analytics) - The stock of U.S. consumer credit rose by $11.6 billion in December, marking the smallest monthly gain since January 2021 and surprising to the downside relative to our consensus expectations for a more than $20 billion increase. Nonrevolving credit, which involves larger loans such as automotive and student loans, drove the slowdown in overall consumer credit growth due in part to a year-end slump in new vehicle sales. Revolving credit, which includes households’ credit cards and other forms of short-term debt, also decelerated from the prior month but is still growing at one of its fastest year-over-year rates since the mid-1990s.
Consumer Sentiment Bounces in Early February, but Remains Low (Wells Fargo) - Consumer sentiment bounced in early February, but at 66.4 remains consistent with a historically low level of optimism. A still-tight labor market and slowing inflation are boosting current optimism, though short-term inflation expectations rose and signal inflation remains too hot for consumers.
A reprieve or a stay of execution? (CIBC) - Huge January job gains in both the US and Canada, coupled with a solid bounce in the US ISM services report, made it readily apparent that North America was not in a recession as 2023 got under way. Our own call for a negative real GDP growth rate in Q1 on both sides of the border now looks too pessimistic.
Recession or re-acceleration? (Danske Bank) - Following a period where the discussion was not about if we would have a recession but how long and how deep it would get, focus has now turned to whether we will avoid recession and in fact could be seeing a mild re-acceleration of global growth.
Light Data Week, Soft Landing? (Wells Fargo) - Beyond Chair Powell's interview on Tuesday, it was a light week for economic news. The U.S. trade deficit widened to $67.4 billion at the end of last year, revolving consumer credit increased at its slowest pace since 2021 in December and year-ahead consumer inflation expectations jumped to 4.2% in February.
Holding the Line… For Now (TD Bank) - Since the jobs report, market pricing on the future path of the fed funds rate has firmed, with investors now anticipating two more 25 basis-point hikes by May, bringing the terminal rate to 5.25%. This aligns to FOMC’s last forecast outlined in the December Summary of Economic Projections. In contrast, markets differ from the Fed on the timing of rate cuts, with interest rate cuts priced in by financial markets for later this year, whereas the Fed doesn’t foresee that happening until 2024.
Europe
Fiscal policy and high inflation (ECB) - The euro area, like other advanced economies, has been facing challenges posed by the rapid and strong increase in inflation. Since mid-2021, inflation in the euro area has increased at a pace last seen in the 1970s and early 1980s, after having been below the ECB’s 2% target for almost a decade. Headline year-on-year inflation, as measured by the Harmonised Index of Consumer Prices (HICP), rose from 1.9% in June 2021 to 10.6% in October 2022, before falling to 9.2% in December 2022. The steep increase in inflation has to a large extent been the result of supply-side external shocks and, to a lesser extent, demand-driven internal factors.
How much more tightening can the Euro area handle? (Nordea) - Markets have experienced another bout of big swings. Amidst volatility, the big picture remains one of the Fed and the ECB hiking rates further. Rising rates will raise the question of debt sustainability in a number of Euro-area countries again.
Inflation
How Inflation and Relative Price Increases Differ (St Louis Fed) - Economists distinguish between the general price level and the relative price level.
Real Estate
U.S. Housing: Green Shoots (BMO) - The U.S. housing market looks to be carving out a bottom, despite poor affordability and tougher loan standards.
Energy
Crude Oil Outlook: Russia Strikes Back! (BMO) - Moscow’s decision to cut output, coupled with the reopening of China’s economy, suggests that the oil market should tighten throughout the year. Moreover, there is still the prospect that Russia’s OPEC+ partners could further curtail the cartel’s overall production target.
Russian supply cut (ING) - At the end of last week, Russia announced that it would cut oil supply by 500Mbbls/d from next month. This does not change our view on the market, as we had already assumed that Russian supply would edge lower following the EU ban on Russian oil and refined products.
Research
Toward a green economy: the role of central bank’s asset purchases (ECB) - We use a DSGE model to study the effectiveness of green-asset purchases by the central bank (Green QE), along the transition to a carbon-free economy driven by an emission tax, abstracting from price stability considerations. We find that Green QE helps to further reduce emissions, especially in the early stage of the transition. We find that a crucial parameter to determine the effectiveness of Green QE is the elasticity of substitution between the brown and the green good: the higher the elasticity the stronger the impact of the policy on emissions.
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