US CPI Sees First Monthly Decline Since 2021
Economic news and commentary for January 12, 2023
US CPI
US CPI fell -0.1% MoM to 6.5% YoY in December, down from 7.1% YoY in November. The monthly decline marks the first time the headline index recorded a negative movement since October 2021. This can be attributed to another robust decline in energy prices, down -4.5% MoM, that was spurred on by a -9.4% MoM decline in gasoline prices. Food prices recorded the weakest monthly increase in 2022, up just 0.3% MoM on the month as the indexes for both meals at home and meals abroad saw only a slight increase. The picture becomes a bit mixed when looking at core CPI. The less volatile index grew 0.3% MoM with an annual increase of 5.7% YoY, down from 6.0% YoY in November. A deflationary impulse from non-energy goods helped keep the monthly gain low with categories like used cars and trucks (-2.5% MoM) and airline fares (-3.1% MoM) seeing robust declines. These heavily weighted segments offset some dim gains in other segments like medical care goods up 0.1% MoM and apparel up 0.5% MoM. The biggest storyline, however, is in services CPI which grew 0.5% MoM to 7.0% YoY, up from the 6.8% YoY increase in November. The shelter subindex reported its sixth straight monthly increase above 0.5% and now earns the reputation of being the main spoiler to the deflation train. As inflation in other categories has started to fade away, the shelter index accounts for more than half of the total annual increase in all items less food and energy.
The stubborn shelter CPI component presents a problem to the Fed’s plans for policy guidance. There are many real time measures of home prices and rents that are showing a decline in shelter costs including the S&P Global Case-Shiller index, the FHFA House Price index, and other more informal indicators like Zillow Rent Index. Shelter CPI contradicts with the narratives these indicators paint and keeps the headline CPI higher than what it could be if real time data were used. The Fed will undoubtably recognize these dynamics and could use them to declare victory over inflation, but it would have to do so against contradictory official data. This would send unclear messages to financial markets which have been assured of the FOMC’s hawkishness. Regardless of the Fed’s posturing, one message that markets will receive is that both supply and demand driven inflation is fading. Eyes will now be on the labor market to show its own cooling as wage inflation becomes the focus of the discussion.
China CPI & PPI
China's output PPI fell -0.5% MoM and -0.7% YoY in December, this is up from -1.3% YoY in November. Input PPI fell -0.4% MoM but edged up to -0.4% YoY from -0.6% YoY. Data through the end of the year show that COVID restrictions and spread continue to have a deflationary effect on firms’ pricing. The deflation was broad-based with mining goods prices down -0.6% MoM, raw materials prices down -0.8% MoM, and processing goods down -0.3% MoM (and -2.7% YoY). While there were some slight increases in the output prices for daily necessities (0.1% MoM) and consumer durables (0.1% MoM), weak demand has continued to restrict firms’ pricing power. Some of the largest drops came in energy categories: the fuel, power category was down -0.7% MoM, the oil & gas extraction industry saw output prices fall -8.3% MoM, and the output prices of oil, gas, and coal processing fell -3.5% MoM. This of course hurts margins for those companies, but in general, energy costs falling helps all firms’ better manager nonlabor costs. It will be interesting to see how firm pricing evolves in 2023 as China opens up the economy more. The initial feeling is that it will be a tentative resurgence as outbreaks occur and hesitation delays a full reopening. Regardless, that reopening will occur in tandem with the rest of China’s trading partners heading into an industrial downturn. With that being said, PPI is likely to remain mute in Q1 2023 and will be fortunate to surface above the 0.0-1.0% YoY level.
Chinese CPI was flat in December and up 1.8% YoY, though it was faster than the 1.6% YoY growth in November. Consumer prices grew at a monthly pace of zero or negative in half of the months in 2022 thanks to the restrictive COVID policies. Activity is still sluggish despite the plans for reopening that were recently announced. Food prices are the only category showing any sort of inflationary pressures with a 0.5% MoM increase to 4.8% YoY. The non-food segment fell -0.2% MoM including residence CPI down -0.1% MoM, transport and communication CPI down -1.4% MoM, and healthcare CPI completely flat. Core CPI barely budged, up just 0.1% MoM to 0.7% YoY, feeling a minor upswing from services at 0.1% MoM. The largest deflationary impulse came in gas prices which fell -6.0% MoM, but thanks to the surge in energy prices in 2022, they were still up 10.4% YoY. The forecast for CPI in 2023 is for weak CPI in the beginning of 2023 to give way to some more normalization in the back half of the year. The Chinese government is still learning to tolerate more COVID cases, and the recent spread of the disease after the reopening of the economy means that this will be a careful, methodical process. There’s no telling how long the latest wave will last or if we will even know how long is will last, and as a result, activity will stay deadlocked in the face of uncertainty.
Still to come…
10:30 am (EST) - US EIA Natural Gas Report
4:30 pm - US Fed Balance Sheet
Morning Reading List
Other Data Releases Today
Jobless claims grew 1,000 to 205,000 last week. The uninsured employment rate fell -0.1 ppts to 1.1%. Continued claims fell -63,000 to 1.63 million.
ECB Consumer Expectations Survey results: November 2022 (ECB) - Compared with October: consumer inflation expectations 12 months and three years ahead declined; expectations for nominal income growth over the next 12 months increased, while expectations for nominal spending growth decreased; expectations for economic growth over the next 12 months increased, whereas expectations for the unemployment rate in 12 months’ time decreased; consumers expected growth in the price of their home over the next 12 months to remain broadly unchanged, while their expectations for mortgage interest rates 12 months ahead continued to drift upwards.
US
US Dollar Credit Supply: 2023 Supply forecasts (ING) - Corporate supply totalled US$555bn in 2022, as we had forecast. We expect supply to be no more than US$600bn in 2023. Similarly, Corporate Reverse Yankee supply should remain slow at €40bn in 2023.
Europe
The China connection: short-term boost, long-term worry (Danske Bank) - Chinese pent-up demand could boost euro area activity during the summer of 2023, but also create new inflation concerns for ECB. Tourism will likely be the main channel, while the scope for higher goods exports seems more limited.
EUR rates 2023: Smile and wave (Nordea) - Recessions are in every 2023 outlook. However, the 2023 recessions will be mild and short-lived, according to most forecasters and central banks, and markets take it that recessions will be just shallow enough for earnings growth and corporate balance sheets to keep supporting equities and credit spreads but just enough for inflation to fall… in a straight line, almost … exactly to the central banks’ inflation targets.
Euro Credit Supply 2023: Supply forecasts (ING) - 2022 was another bumper year for bank bond supply. Looking into 2023 financials, bond supply is likely to face another strong year.
Economic Bulletin Issue 8, 2022 (ECB) - Economic growth in the euro area slowed to 0.3% in the third quarter of the year. High inflation and tighter financing conditions are dampening spending and production by reducing real household incomes and pushing up costs for firms. The world economy is also slowing, in a context of continued geopolitical uncertainty, especially owing to Russia’s unjustified war against Ukraine and its people, and tighter financing conditions worldwide. The past deterioration in the terms of trade, reflecting the faster rise in import prices than in export prices, continues to weigh on purchasing power in the euro area.
Employment
Labour market cools as recruitment downturn intensifies (S&P Global) - The UK labour market continued to cool at the end of 2022, according to survey data compiled by S&P Global. A sharp drop in the number of people placed in permanent jobs during December meant hiring in the fourth quarter of last year was the weakest since the global financial crisis if lockdown months are excluded.
Number of involuntary part-time workers in December 2022 below pre-pandemic levels (BLS) - The number of people at work part time for economic reasons, also called involuntary part-time workers, totaled 3.9 million in December 2022. These workers would have preferred full-time employment but were working part time because their hours had been reduced due to slack work or they were unable to find full-time jobs. This was a half million fewer people than in February 2020, the month before the start of the COVID-19 pandemic and the recession that resulted from it.
Inflation
Agricultural annual prices in 2022 – first estimates (Eurostat) - First estimates of agricultural price indices for 2022 indicate that they were substantially higher than 2021 for almost all the main product categories as well as for key agricultural inputs.
Canada
The Bank of Canada: To Err is Human, To Forgive Is Divine, To Evolve Is Necessary (TD Bank) - There’s no shortage of articles criticizing the Bank of Canada (BoC) for its policy decisions and communication. However, those who live in glass houses should not throw stones. During the pandemic, analysts encouraged the central bank to provide forward guidance. It was sometimes pointed out that its U.S. counterpart had greater transparency because it showed forecasts on the unemployment rate alongside the famous “dot plot” of the committee’s policy rate expectations.
Canadian Headwinds Continue to Mount (Wells Fargo) - Heading into 2023, the outlook for the Canadian consumer in particular suggests a further downshift in growth may be forthcoming. Amid rapid inflation, real household disposable incomes are falling, which should restrain consumer spending. Rising interest rates should also weigh on the housing sector and broader consumer activity.
In sickness and in “health”: Canada’s labour market (CIBC) - The Bank of Canada has suggested that a rise in the unemployment rate is necessary to cool inflation, with tightness in the labour market a sign of excess demand within the economy. However, the current low jobless rate doesn’t just reflect strong demand. It also reflects the fact that a sicker labour force means that a lower, or healthier looking, unemployment rate is needed to achieve the same level of supply that we enjoyed pre-pandemic.
Manufacturing
Industrial price pressures keep fading, as global manufacturing slump deepens (ABN AMRO) - Global manufacturing PMI drops further in December, albeit marginally. Industrial price pressures continue to fade... with supply-demand imbalances correcting further.
Financial Markets
Foreign Banking Organizations in the United States and the Price of Dollar Liquidity (Liberty Street Economics, New York Fed) - Foreign banking organizations (FBOs) in the United States play an important role in setting the price of short-term dollar liquidity. In this post, based on remarks given at the 2022 Jackson Hole Economic Policy Symposium, we highlight FBOs’ activities in money markets and discuss how the availability of reserve balances affects these activities.
Global bond investments: Japan sold bonds across the globe in November (Nordea) - This night we received November data on Japanese global bond investments. The story is the same as the last many months, they sell foreign bonds. Also Danish callable bonds!
Real Estate
Mortgage Activity Remains at Low Levels (NAHB) - Per the Mortgage Bankers Association’s (MBA) survey through the week ending January 6th, total mortgage activity increased 1.2% from the previous week and the average 30-year fixed-rate mortgage (FRM) rate fell sixteen basis points to 6.42%. The FRM rate has remained near 6.4% over the past month.
Outlook
Global Economic Prospects: January 2023 (World Bank) - Global growth is expected to decelerate sharply to 1.7 percent in 2023—the third weakest pace of growth in nearly three decades, overshadowed only by the global recessions caused by the pandemic and the global financial crisis. This is 1.3 percentage points below previous forecasts, reflecting synchronous policy tightening aimed at containing very high inflation, worsening financial conditions, and continued disruptions from the Russian Federation’s invasion of Ukraine.
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