Japanese inflation remains highly subdued

Chris Scicluna
Emily Nicol

Japan’s inflation still extremely subdued, as mobile phone charges remain a significant drag
Contrasting markedly with the very high rates currently experienced in most other major economies, Japan’s inflation numbers out overnight remained extremely subdued. Indeed, consumer prices fell 0.3% on the month in October, to leave headline inflation unchanged at just 0.1%Y/Y. When excluding fresh foods, the BoJ’s forecast measure of core CPI eased 0.1ppt to 0.1%Y/Y. And with energy inflation jumping 3.9ppts to 11.3%Y/Y, the highest in more than thirteen years, the BoJ’s preferred measure of core CPI (excluding fresh food and energy) fell 0.2ppt to -0.7%Y/Y, a four-month low. Moreover, on the international comparable gauge (excluding food and energy), Japan’s core CPI fell 0.4ppt to -1.2%Y/Y, the weakest since April and a far cry from the rates in the US and Europe.

Of course, the government’s initiative to lower mobile charges remained a significant source of weakness, with the 53.6%Y/Y(!) drop knocking a further 1.5ppt off headline inflation. This was in part offset by a sizeable boost to hotel charges (59.0%Y/Y), flattered to some extent by the low base a year ago as prices were artificially lowered by the government’s ill-fated “Go-To Travel” tourism subsidies. And while household durable goods inflation fell (-4.1%Y/Y) by the most since mid-2018, there were some signs of pandemic-related price pressures among certain items – e.g. inflation of motor vehicles rose 3.2ppts to a series high 5.1%Y/Y. Given the pandemic-related disruptions to prices and the sizeable drag from mobile phone charges, it remains difficult to assess the underlying trend in Japanese inflation. But the increase in the BoJ’s measure of the 10% trimmed mean CPI in September by 0.3ppt to 0.6%Y/Y (the highest since mid-2019) implies a modestly positive trend. On Wednesday, the BoJ will publish its updated numbers for this measure, which seem bound to remain way below the equivalent rate in the euro area (2.9%Y/Y) and the 16% trimmed-mean CPI rate in the US (4.1%Y/Y).

UK retail sales rise for first month in six, consumer confidence a touch firmer too
UK retail sales volumes increased for the first time in six months in October, rising 0.8%M/M following a revised reading of 0.0%M/M the prior month. So, while sales were up 5.8% from the pre-pandemic level in February 2020, they were still down 2.2%3M/3M. Growth last month came exclusively from stores of core (i.e. non-food and non-fuel) items, where sales rose 4.2%M/M, seemingly as consumers started buying for Christmas earlier than usual amid fears of being caught short closer to the festive season amid persistent supply shortages. Within the core category, clothes store sales rose 6.2%M/M, rising to within 0.5% of the pre-pandemic level. Meanwhile, food store sales fell 0.3%M/M but were still some 3.4% above the pre-pandemic level. And with shoppers feeling more comfortable about returning to the shops, the share of sales online fell to 27.3%, the lowest since March 2020 but still more than 7ppts above the pre-pandemic level. Fuel sales fell 6.4%M/M to be 5.0% below their February 2020 level.

Growth in October took the level of retail sales 0.6% above the Q3 average, seemingly a platform for firm growth over Q4 as a whole. But we suspect that sales will edge lower as Christmas approaches, as festive demand is satisfied earlier than normal and supply constraints bind. And falling real disposable incomes amid higher prices (the retail price deflator rose to 3.8%3M/Y in October) will also likely weigh. However, the latest GfK survey consumer confidence indicator ticked up this month to support our expectation of modestly positive growth in spending over the quarter as a whole. Having dropped to an eight-month low in October, the headline GfK indicator rose 3pts in November to -14, back in line with the average of the year to-date. The improvement was in part related to perceptions of the economic situation (both forward- and backward-looking), while the climate for making major purchases was judged to be the most favourable since August. Overall, therefore, after this week’s stronger jobs and inflation figures, today’s sales and confidence data provide additional cover for a BoE rate hike next month.

German PPI inflation surprises on the upside again, rising most since 1951(!)
Once again, Germany’s producer price inflation surprised significantly on the upside in October. In particular, prices rose a hefty 3.8%M/M, the highest this sequence, to push the annual PPI rate up 4.2ppts to 18.4%Y/Y, the loftiest reading since November 1951. Perhaps inevitably, the jump was driven by higher energy prices, which rose by more than 12% on the month to be up 48%Y/Y, powered by significantly higher inflation of natural gas (81%Y/Y) and electricity (49.6%Y/Y). When excluding energy, producer price inflation rose 0.6ppt to 9.2%Y/Y, of which producer intermediate price inflation rose 0.7ppt to an extremely strong 18.1%Y/Y as increases in the prices of metals remained elevated. And while the respective rates of growth were substantially softer, inflation of producer capital and consumer durable goods also continued their upwards trends, to 3.2%Y/Y and 3.4%Y/Y respectively, suggesting some increased pass-through from higher costs of energy, materials and components.

Fed speeches the focus on a quiet day for US economic data
On a quiet end to the week for US economic releases, one focus will be fiscal policy, with the House now set to vote on Biden’s Build Back Better bill after the CBO yesterday stated that the measures would result in a net increase in the federal deficit of $367bn over ten years while strengthened tax enforcement would reduce the deficit by $127bn over the same period. After yesterday’s comment from Atlanta Fed President Bostic that “by the summertime of next year… [it might be] appropriate for us to normalize our interest rate policy”, some attention today will likely be on speeches by Fed Vice Chair Clarida and Governor Waller. 

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