Japan Sees Highest Inflation in 40 Years, Hot US Data Delays Disinflation
Economic news and commentary for February 24, 2023
Japan CPI
Japan's CPI grew 0.5% MoM and 4.3% YoY in January, up from 4.0% YoY in December. The recent run in price growth has led to the highest annual inflation on over 40 years, since 1981. The rise in core CPI, up 3.2% YoY in January from 3.0% YoY in December, hasn’t been this strong in 30 years, since 1990. What’s driving the high prices? The increase in the headline index is mostly driven by increases in food costs. Food CPI grew 1.4% MoM to 7.3% YoY as fresh food, especially fruits and vegetables, see strong inflationary pressure. Japan has seen monthly increases in food prices of 1% or more three times in the last five months. Energy prices are also consistently rising and have been since December 2020. This has them higher by 14.6% YoY. Core prices are also on the rise which means there have been noticeable increases outside of the volatile categories. Culture & recreation saw a hefty 1.1% MoM increase in January on a rise in both recreation goods and services, and that was the main contributor to monthly inflation. In general, the broad core segments are seeing slight rises offsetting the declining categories which hasn’t been the case in recent years. This keeps the annual pace of growth of many subindexes elevated like household durables up 11.1% YoY, domestic non-durables up 4.8% YoY, and clothing up 3.1% YoY.
This broad inflationary trend is what is most troubling for the Bank of Japan (BoJ) which remains positioned as ultra-loose in its monetary policy since the onset of the pandemic. Inflation was, at first, welcomed in mid-2022 when the headline number reached the 2% range (the BoJ’s inflation target) and in late-2022 when the core number reached the same range. But now, it seems clear that price pressures are overheating. A stronger China after the reopening has created a new source of demand that is pushing prices higher, and global energy prices are continuing to surprise on the upside as the Ukraine war lingers and recession fears recede in developed economies. On top of that, loose monetary policy has bolstered consumer growth in the face of sluggish productivity. However, manufacturing has started to weaken to a significant degree, as suggested by Japan’s recent PMI readings, which means stagflation can become a threat. It seems that Japan is cycling through the stages of inflation that the rest of the world did before they moved aggressively on rates. Maybe it’s time for the BoJ to do the same.
US Personal Income and Outlays
Consumption and income data released today confirm much of what we already knew. January was a hot month (in more ways than one). Personal income grew 0.6% MoM last month with disposable income surging 2.0% MoM. Even when adjusting for inflation, disposable income was still up a strong 1.4% MoM. The strong increase in income had an understandably strong effect on consumption. On the month, real personal consumption jumped 1.1% MoM, reversing two months of -0.3% MoM declines in November and December. The gain in consumption was a result of goods consumption surging 2.2% MoM after weak holiday months saw that category down -1.2% MoM and -1.1% MoM consecutively. While most of this can be explained by strong auto spending as a result of rental companies refreshing their fleets, it does not discount strength in other durable goods areas as well as solid growth in nondurables (0.5% MoM) and services (0.6% MoM). In absolute terms, January’s real consumption growth ($161.0 billion) was almost double what it was in the last seven months ($87.1 billion). So even if you were to attribute half of that to new auto sales, the leftover gain would still be around the same as the last seven months.
We had robust gains in income and consumption, now we shouldn’t be surprised when prices respond favorably. Both the PCE price index and the core PCE price index grew 0.6% MoM with the annual paces both accelerating 0.1 ppts to 5.4% YoY and 4.7% YoY, respectively. Goods and services both increased at that same rate of 0.6% MoM with energy leading both categories up 2.0% MoM. This pushed services inflation above the peak set in October 2022 to 5.7% YoY. The bottom line is that this data will drive the Fed and the market sentiment hawkishly. There doesn’t appear to be any signs of abatement in services prices, and in fact, if January is not an outlier, services prices are increasing. But it is important to note that 2023 started off with hot economic data that is likely to moderate in February, especially when starting from a high base in the month-to-month comparison. There is likely to be some negative macro data reported for this month, but the magnitude is important. The January heat needs to be chill if the status quo on rates is to be upheld. If not, we could see a return to 50 bps hikes in March or May.
Germany GDP
A quick note on German GDP. It was a lot worse than initially reported. First, the top-line German Q4 2022 GDP growth number was downgraded by -0.2 ppts to -0.4% QoQ. This shows a deeper decline, but it’s not that different from the advance estimate. The devil is in the details. Household consumption was very weak fell -1.0% QoQ, and gross fixed capital formation fell -2.5% QoQ as investment in construction (-2.9% QoQ) and equipment (-3.6% QoQ) were both very weak. Net exports benefitted from a decrease in imports that was larger than the decrease in exports, but in the end, it only grew 0.1% QoQ. Besides that, the only positive segments of GDP were government expenditures, up 0.6% QoQ, which cushioned the decline felt in household consumption, and inventory growth, up 0.3% QoQ. This revision and the GDP details seem to reverse some of the suspicions that the chances of a recession are shrinking. Although Germany is the most sluggish European economy in terms of growth right now, so this could just be a problem for them. However, just like we saw a revision in the euro area inflation report due to the delayed German data, this revision could reduce Q4 2022 euro area GDP growth in a future release.
Still to come…
10:00 am (EST) - US New Home Sales
10:00 am - US Consumer Sentiment
Morning Reading List
Other Data Releases Today
The GfK consumer sentiment index is forecasted at -30.5 in Mar, up 3.3 pts from -33.8 in February. Economic expectations in February jumped 6.6 pts to 6.0, the 4th increase in a row. Income expectations are still low at -27.3, but up 4.9 pts.
German GDP
German GDP growth of -0.4% proves that a recession is in the making (ING) - The third estimate of German GDP growth in the final quarter of 2022 shows that celebrating resilience was a bit premature. A technical recession is in the making.
US
FOMC minutes (January 31–February 1, 2023) (EY Parthenon) - The Federal Open Market Committee (FOMC) minutes stressed Federal Reserve officials’ desire to maintain flexibility and optionality in tightening monetary policy. With the policy stance now being sufficiently restrictive, policymakers want to allow economic data to guide their future policy decisions. Still, we view the Fed’s extreme data dependence as a risky backward-looking strategy in a highly volatile macroeconomic environment.
Pushing the Limit: Last-Minute Debt Limit Resolutions Have Increased Market Volatility and Uncertainty (Kansas City Fed) - Since reaching the debt limit in January 2023, the U.S. Treasury has used extraordinary measures to fund the government. However, the Treasury estimates those measures will be exhausted later this year. To gauge possible effects, we review economic and financial market outcomes during previous debt limit episodes. In each case, these episodes led to increased borrowing costs, financial market volatility, and uncertainty, particularly when the resolutions were prolonged.
Research US - We expect a debt ceiling resolution only by next summer (Danske Bank) - The U. S. Treasury hit the statutory debt limit 19th of January, which means it can only borrow to replace maturing debt until the limit is lifted or suspended. The government can avoid a default by using extraordinary funding measures and remaining cash balances, which are expected to last until July-September.
A Turning Point in Wage Growth? (Liberty Street Economics, NY Fed) - The surge in wage growth experienced by the U.S. economy over the past two years is showing some tentative signs of moderation. In this post, we take a closer look at the underlying data by estimating a model designed to isolate the persistent component—or trend—of wage growth. Our central finding is that this trend may have peaked in early 2022, having experienced an earlier rise and subsequent moderation that were broad-based across sectors. We also find that wage growth seems to be moderating more slowly than the trend in services inflation.
Real GDP Growth in Q4 Was Revised Lower to a 2.7% Annual Rate (First Trust Portfolios) - Real GDP growth in Q4 was revised lower to a 2.7% annual rate from a prior estimate of and consensus expected 2.9%.
Fourth quarter growth appeared strong on the surface, but underlying details remain soft (TD Bank) - Consumer spending growth was revised down from 2.1% in the advance estimate, to 1.4%. Gains were entirely concentrated in services (+2.4%), while goods spending was revised down, recording a modest pullback (-0.5%). Spending on durables goods (-1.8%) was lower on the quarter, while non-durables (+0.2%) were flat.
US | Market interest rate expectations moved towards Fed's plans amid a run of strong data (BBVA) - Futures markets now expect a 5.50% peak for the fed funds rate by mid-year, but still anticipate a rapid easing cycle in 2024.
Globalization in Retreat: Implications for the U.S. Economy Part II: Foreign Direct Investment (Wells Fargo) - Flows of direct investment capital, both inbound to the U.S. economy and outbound, rose significantly starting in the 1990s. However, FDI flows have been more or less flat in recent years.
Bullard Discusses Disinflation, Rate Increases and Economic Resilience on CNBC (Jim Bullard, St Louis Fed) - During an appearance on CNBC, St. Louis Fed President Jim Bullard discussed disinflation, the federal funds rate and the resilience of the U.S. economy. To help curb inflation, Bullard said his target federal funds rate would be 5 3/8%. The target range for the rate currently is 4.5% to 4.75%.
Europe
ECB suffers financially under its own rate hikes (ING) - By using former risk provisions, the European Central Bank avoided presenting a loss in its 2022 financial accounts.
Households: Heavy interest burden on thin ice (Nordea) - Swedish households are treading on thinner ice while the rate hikes have yet to reach full impact. The buffer built during the pandemic has already been exhausted. Large forces are at play and the risks are higher than they have been in a long time.
Japan
Bank of Japan’s new governor Ueda – continuity with flexibility (Saxo Bank) - The policy stance of Bank of Japan’s governor nominee Kazuo Ueda, became much clearer with the parliamentary hearings kicking off today. He assured continuity of the current easy monetary policy with a steadfast focus on achieving 2% inflation sustainably.
Canada
BMO Business Activity Index — Can the Centre Hold? (BMO) - BMO's Canadian Business Activity Index (BAI) rose 0.3%, highlighting that the mild January primed real activity to start the year. That comes after an upwardly-revised 0.2% drop in December. Now we're left to ponder whether the Canadian economy can escape its Yeatsian fate amid restrictive interest rates and elevated inflation.
Business Are Weathering the Storm for Now (TD Bank) - The CFIB Small Business Barometer nudged upwards for a third straight month as confidence about the next 12-months rose 0.5 points to 51.7 in February. The short-term outlook based on a 3-month ahead index notched a 2-point gain to 48.9, but still sits in contractionary territory.
Canadian Consumers Start the Year Strong (TD Bank) - TD's latest debit and credit card spending data signals that consumers kept their purse strings open through the start of 2023. Following a sizeable jump in December, spending continued to rise in January in both nominal and inflation-adjusted terms. With inflationary pressures easing recently, the gap between the two metrics has also narrowed.
Australia
Australian GDP Preview: Q4 2022 (NAB) - NAB sees a 0.8% q/q (2.8% y/y) GDP print for Q4 2022. Household spending looks to have remained resilient to rising rates and inflation. In part, this reflects the ongoing recovery in services spending. Elsewhere, investment looks to have fallen slightly, while net exports will provide a large boost, partially offset by the stock cycle.
Inflation
One year since Russia’s invasion of Ukraine – the effects on euro area inflation (ECB) - Russia’s unjustified war against Ukraine and its people is first and foremost a human tragedy. It is also having an economic impact on Ukraine and beyond. This ECB Blog post – the first in a series about the economic effects of the war – focuses on inflation in the euro area.
Recent changes in consumers’ medium-term inflation expectations – a detailed look (ECB) - In this article, we exploit the richness and flexible design of the ECB’s Consumer Expectations Survey (CES) to explore in detail recent changes in consumers’ medium-term inflation expectations. The data suggest that over the course of 2022 these expectations became less well anchored around the ECB’s 2% inflation target. By taking the necessary monetary policy actions and by actively communicating how monetary policy is contributing to stabilising future inflation, the ECB can help strengthen public trust and prevent recent price and cost shocks from having longer-lasting effects on inflation expectations.
Wage pressures not as inflationary as perceived (CIBC) - Last year the average wage in Canada rose by 4.8%. Now, before you storm into your boss’s office to complain about your below average pay raise, you have to remember that this average masks more than it reveals. At any point, a change in average wage reflects not only a pure pay increase but also changes in the composition of labour. And during each one of the pandemic years, that change in composition was very pronounced. This has important implications for our understanding of the inflationary potential of the current wage trajectory.
How and why “money” matters again (DWS Group) - Monetary aggregates can help increase accuracy in inflation forecasts. It is nice to see such ideas finally catching on again, but don’t get carried away either.
Real Estate
Missing Middle Housing Production Lags (NAHB) - While townhouse construction has trended higher in recent quarters, the multifamily segment of the missing middle (apartments in 2- to 4-unit properties) has disappointed. For 2021, there were only 12,000 starts of such residences. This is flat from from 2020, during a period of time when most construction segments expanded. For 2022, the total increased but to only 16,000. Nonetheless, this marks the best year for this type of multifamily construction since the Great Recession.
Home Prices Are Overvalued but Will Decline Only Gradually (Kansas City Fed) - The surge in home prices since the start of the pandemic and the sharp increase in interest rates during 2022 have made purchasing a home much less affordable. Homeownership costs relative to rents suggest home prices are considerably overvalued. However, relief is unlikely in the near future: owners have an incentive to remain in their current homes until rates decrease, mitigating downward pressure on prices.
Manufacturing
February’s worldwide manufacturing and services PMI update (S&P Global) - Global manufacturing and services PMI data will be released in the coming week, following the updates from the February flash figures.
Outlook
International Economic Outlook: February 2023 (Wells Fargo) - The outlook for global activity continues to edge higher, and we now forecast global GDP growth of 1.96% for this year.The economies of the Eurozone and the United Kingdom in particular are showing more resilience than previously anticipated, as cost of living pressures ease. For 2023, we expect Eurozone GDP to edge up 0.1%, while our forecast for a 0.6% contraction in U.K. GDP this year is smaller than we previously expected.
Major forecasts: Peak rates not even in sight yet (Nordea) - The resilient economy implies central banks will need to hike rates to ever higher levels. We see the Fed’s benchmark approach 6% and the ECB’s 4% later this year. Also longer yields have more upside potential, while EUR/USD may see a short-term dip.
Research
From Ye Olde Stagnation to Modern Growth in England (St Louis Fed) - Modern economic growth—the sustained increase of real gross domestic product (real GDP) per capita—is a relatively recent phenomenon in world history. But what led an economy to transition from stagnation to modern growth? Population and land availability contributed to the shift, but in what ways? In this essay, I describe the "pre-modern growth period" of England's history and its transition to modern growth. I document population and GDP trends surrounding the Black Death pandemic of the early 14th century and the role of technological progress, specifically in agriculture.
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