Japanese headline inflation eases slightly on softer food and energy, but BoJ’s forecast measure of core CPI rises further above target
Today’s Japanese inflation figures broadly aligned with expectations. Contrasting with the continued upwards trend seen in the other major economies last month, headline inflation eased very slightly in June, by 0.1ppt to 2.4%Y/Y. This largely reflected a sharp decline in fresh food price inflation, by 5.8ppts to 6.6%Y/Y, a five-month low as the annual rate of increase in the price of fresh vegetables slumped 9.8ppts to 3.3%Y/Y. As such, when excluding fresh foods, the BoJ’s forecast measure of core CPI rose 0.1ppt to 2.2%Y/Y, the highest since March 2015 (or September 2008 when excluding the impact of the consumption tax hikes).

But while energy inflation eased for the fourth consecutive month due to government fuel subsidies, at 16.5%Y/Y it still accounted for roughly half of total inflation. And with food contributing a further 1ppt, underlying price pressures still remained very subdued. Indeed, services inflation remained in negative territory for the sixteenth consecutive month (-0.3%Y/Y). And despite continued supply-side pressure on prices of certain household goods and furniture, non-energy industrial goods inflation also remained close to zero. As such, core inflation on an internationally comparable basis (i.e. excluding all food and energy) merely moved sideways at 0.2%Y/Y, negligible compared with the equivalent rates in the US (5.9%), euro area (3.7%) and UK (5.8%), and supporting the BoJ’s decision yesterday to maintain its ultra-accommodative policy stance.

Japanese PMIs surprised on the downside at the start of Q3
After the BoJ flagged downside risks to the near-term growth outlook, today’s flash PMIs signalled a loss of recovery momentum at the start of the third quarter as supply constraints and cost burdens weighed. Indeed, the headline composite output PMI fell 2.4pts on the month to 50.6, a four-month low, with the new orders component down for the third month out of the past four to 51.2. The weakness was driven by the services sector, with the activity index down 2.8pts to 51.2, admittedly still comfortably above the long-run average (48.5) and pointing to ongoing albeit moderate expansion. But challenges remained in the manufacturing sector, as the output PMI fell more than 1pt to 49.5 in July, the second-lowest reading in the past ten months, with the new orders component (49.2) the weakest since November 2020. While there was tentative evidence that price pressures may have peaked – the composite input price PMI fell for the first month in six – firms were less upbeat about business expectations for the coming year.

UK retail sales down for fourth successive quarter in Q2 despite modest drop in June
This morning’s UK retail sales data were a mixed bag. While the decline in real sales in June was smaller than expected, that confirmed a fourth successive quarterly drop in Q2. Indeed, while the level of sales was still 2.2% above the pre-pandemic level in February 2020, it was down a steep 5.8%Y/Y. And another very weak showing for consumer confidence points to the likelihood of further weakness in sales in the second half of the year as real incomes are further eroded by high inflation.

In particular, total sales declined just 0.1%M/M in real terms in June, which might have suggested some resilience in the face of high inflation. Indeed, in part, the drop reflected a sharp decline in auto fuel sales, as many consumers reportedly delayed filling up their tanks in the face of record high petrol prices – excluding fuel, sales unexpectedly rose 0.4%M/M. However, overall sales in June were flattered by an exceptional surge of 3.1%M/M in purchases of food related to the extra bank holiday that month. In contrast, non-food sales fell 0.7%M/M as purchases of clothing fell a steep 4.7%M/M and households goods fell 3.7%M/M, with both components probably impacted by the rail strikes at the end of the month.

Consumer confidence remains close to series low suggesting that sales will remain weak
Looking through the month-to-month volatility, the trend remains very poor. With sales in May revised down (now estimated to have fallen 0.8%M/M), real retail sales fell for the fourth successive quarter in Q2 and by a substantive 1.2%Q/Q, with the same pace of decline when auto sales are excluded. And looking ahead, sales seem bound to remain subdued at best. Indeed, the latest GfK consumer confidence survey released overnight suggested (unsurprisingly) that household sentiment remains exceptionally weak. While the headline confidence rose a slight 1pt (to -41) in July, that came from the record low in June. Within the detail, households judged the recent economic performance to have been worse than previously expected, as the impact of higher inflation and rising interest rates continued to weigh. But while there was a very modest improvement in their expected financial situation over the coming twelve months, GfK attributed this to hopes of a cut in taxes once the next Prime Minister – still yet to be determined – takes office in the autumn. This notwithstanding, the relevant survey index remained some 37pts lower than a year ago. And so, households unsurprisingly still considered the climate for making major purchases to be extremely unfavourable – indeed, despite edging up 1pt on the month, at -34 the relevant index was 36pts lower than a year ago and well below the long-run average (-1).

Flash July PMIs from the euro area, UK and US likely to flag slowing momentum; ECB survey of forecaster also to be watched

Looking ahead to the rest of the day, the flash July PMIs will be published from the euro area, UK and US and will be watched for a further weakening of economic growth momentum at the start of the third quarter. Indeed, the euro area composite PMI is expected to fall to a seventeen-month low of 51.0 in July, with the services activity PMI expected to drop to its lowest level (52.0) since January and the manufacturing output PMI likely to remain below 50 suggesting contraction in the sector. In the UK, the composite output PMI is forecast to fall by more than 1pt in July, from 53.7 in June, with weakening in both services and manufacturing contributing to the slowdown. But in the US, having fallen to a five-month low in June, the composite output PMI is forecast to have moved broadly sideways at 52.3.

Separately, the results of the ECB’s survey of forecasters might give a further clue as to why the Governing Council ignored its earlier guidance and hiked rates by 50bps yesterday, particularly if it reports an upwards revision to medium-term inflation expectations.