Japanese inflation drops further than expected

Chris Scicluna
Emily Nicol

Japanese inflation drops further than expected at the start of 2022, with weakness in part reflecting government policy
While other major central banks face up to the most intense inflationary pressures for decades and consider how quickly they should normalise monetary policy, today’s Japanese CPI numbers further illustrated why the BoJ continues to push back against expectations that it too needs to exit its ultra-accommodative policy stance. Headline inflation fell a steeper-than-expected 0.3ppt in January to just 0.5%Y/Y, a three-month low. While this in part reflected an easing in fresh food inflation (down 2.5ppts to 6.0%Y/Y), core inflation measures also fell back. The BoJ’s forecast measure (excluding fresh foods) fell 0.3ppt to 0.2%Y/Y, while the measure excluding fresh foods and energy fell 0.4ppt to -1.1%Y/Y, a near-11-year low. Moreover, the internationally comparable core CPI rate slumped to -1.9%Y/Y, its lowest since the series began in 1970.

Admittedly, the slowdown last month related to government policy, with base effects associated with the ‘go to travel’ campaign having dropped out of the annual calculation. Indeed, hotel charges were up just 0.6%Y/Y in January having risen by 44%Y/Y in December to subtract 0.4ppt from headline inflation. Fire insurance premiums (up 1.7%Y/Y from 15.8%Y/Y previously) also subtracted 0.1ppt. And of course, last April’s mobile phone tariff cut continued to weighed significantly, down a whopping 53.6%Y/Y to subtract a hefty 1.5ppts from inflation. As such, services inflation was down 0.8ppt to -2.7%Y/Y.

There were, however, some signs of upwards pressures on goods inflation, reflecting the weaker yen and supply constraints. Indeed, non-energy industrial goods inflation rose 1.0ppt to -0.5%Y/Y in January, with clothing inflation at a sixteen-month high and recreational durable goods inflation at its second-highest level since September 2020. But inflation of other household durable goods remained extremely weak, recording the steepest annual decline since May 2018. Meanwhile, among non-core items, energy inflation again provided the most significant upwards impulse, rising 1.5ppts to 17.9%Y/Y, the highest for 41 years, to account for 1.3ppts of headline inflation.

Japan’s near-term inflation outlook in part remains clouded by the pandemic. Nevertheless, all of the main rates of inflation will receive a notable boost in April when the drag from the mobile phone charges drops out of the calculation. Our colleagues in Tokyo expect the BoJ’s forecast measure of core CPI to jump to the lofty heights of 1.5%Y/Y. But not least reflecting an expected easing in energy pressures and easing of supply bottlenecks in due course, this could well mark the peak, with core CPI forecast by our colleagues to fall back just below 1%Y/Y from Q3 onwards.

UK retail sales in January reverse less than half of December’s drop to suggest loss of spending momentum due to erosion of real incomes
UK retail sales were a touch stronger than expected in January, rising 1.9%M/M. However, this reversed a little less than half of the drop in December, which was even bigger than previously thought at a hefty 4.0%M/M. So, while the volume of sales was 3.6% above the pre-pandemic level in February 2020, it was still 6.9% below last April’s peak and 0.5% below the average level in Q4 suggesting a further loss of spending momentum at the turn of the year. Most categories of sales failed to reverse fully their decline in December. For example, while sales in non-food stores rose a firm 3.4%M/M thanks to strong spending on household and DIY goods, they remained 1.8% below the Q4 average and 1.1% below the pre-pandemic level. As retailers sought to pass on increased costs to consumers by limiting the extent of New Year discounts, the volume of sales at clothing and textile stores dropped 5.0%M/M to be almost 8.5% below the Q4 average and 12.5% below the level in February 2020. Food store sales fell 2.3%M/M to be more than 3% below the Q4 average and back below the pre-pandemic level for the first time. With less working from home, auto fuel sales rose 4.1%M/M after a drop of 5.0%M/M in December to buck the trend and rise almost 2% above the Q4 average. And non-store (i.e. largely online) sales rose 8.0%M/M to be 8.0% above the Q4 average and 41.5% above the pre-pandemic level. While the fading of the Omicron wave of pandemic should see a further recovery in shopping centre footfall over the remainder of Q1, sales seem likely to remain subdued as household real incomes are squeezed by higher inflation. Indeed, with consumers looking ahead to April’s increase in household energy bills and taxes, as well as a year of steadily higher mortgage payments, retail sales are likely to remain below the Q4 level in Q1 and probably in Q2 too.

French unemployment down sharply in Q4, French inflation restrained
French data already released this morning revealed a marked drop in mainland unemployment in Q4, of 0.6ppt – the most in a year – to 7.2%, the lowest since 2008 bar the initial drop at the start of the pandemic as workers were registered as inactive rather than unemployed as job search became temporarily impossible. That, of course, is good news for Emmanuel Macron as he heads for a second successive term as President in the spring elections. Finally, France’s final consumer price inflation numbers for January confirmed the flash estimates. So, the national CPI measure rose 0.1ppt to ‘just’ 2.9%Y/Y and the EU-harmonised HICP measure fell 0.1ppt to ‘just’ 3.3%Y/Y (versus the euro area figure of 5.1%Y/Y), with the national measure of core inflation down 0.3ppt to 1.6%Y/Y. Of course, French inflation remains well below rates in the other large member states not least thanks to the government’s efforts to limit the rise in household energy bills. But while electricity prices were up just 3.9%Y/Y, overall energy prices were still up almost 20%Y/Y.

Euro area consumer confidence likely to have ticked up thanks to an easing in the pandemic but remained subdued by high inflation
A relatively quiet end to the week for euro area economic data will bring the European Commission’s preliminary consumer confidence index for February. Having dropped to a ten-month low in January, sentiment might well have firmed a little this month in response to the easing of the latest wave of coronavirus across the region. However, concerns about high inflation are likely to limit any rebound, with the index likely to remain well below the range prevailing between May and November last year. Meanwhile, euro area construction output data are expected to confirm a drop in activity in the sector in December, reflecting steep declines in both Germany and France, with the sector seemingly disproportionately impaired by supply bottlenecks and labour shortages but also perhaps temporarily affected by the timing of the Christmas holidays. Indeed, given strong house price growth in the region, we would still anticipate a firm rebound in activity in the sector in Q1. Finally, after yesterday’s relatively balanced commentary from ECB chief economist Philip Lane and Spanish central bank governor de Cos – who both made the case for a gradual normalisation of policy – today’s ECB-speak comes from the lesser-watched Slovenian governor Bostjan Vasle.

Fed-speak the main US focus; existing home sales and leading indicators also due
After St Louis Fed President Bullard yesterday repeated his call for 100bps of rate hikes by 1 July, and Cleveland Fed President Mester suggested it was appropriate for consecutive rate hikes in coming meetings and added that she would support a faster pace of tightening over the second half of the year if the inflation outlook warranted, focus in the US today will be largely on other Fed-speak, including commentary from New York Fed President Williams, Chicago Fed President Evans and Board Governor Waller. Data-wise, this afternoon will bring the latest existing home sales figures for January, which following yesterday’s weaker housing starts numbers are expected to show sales having moderated at the start of the year, restrained by light inventories and sky-high prices. Meanwhile, the Conference Board’s leading economic indicator is expected to have declined for only the second time in the past 21 months, albeit likely remaining well above the pre-pandemic level in February 2020.

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