Tokyo CPI inflation jumps to a four-decade high

Chris Scicluna
Emily Nicol

Tokyo inflation jumps to 4% for first time since 1981 due to higher energy and food prices
Today’s Tokyo CPI figures saw the headline inflation rate rise a further 0.3ppt in December to 4.0%Y/Y, double the BoJ’s target and the highest since 1981. When excluding fresh foods, of which inflation moderated 3½ppts last month to 4.3%Y/Y, the BoJ’s forecast measure of core inflation jumped a stronger-than-expected 0.4ppt to 4.0%Y/Y, similarly the highest for more than four decades. This partly reflected a further increase in non-perishable food inflation, which rose 0.8ppt to 7.5%Y/Y, the highest since 1976, to account for more than 1½ppts of headline inflation and roughly three quarters of the monthly increase. An increase in gas prices by 36.2%Y/Y, the highest since 1981, also saw the contribution from energy rise to 1.2ppts. So, when excluding all food and energy prices, the internationally comparable measure of core inflation rose just 0.1ppt to 1.3%Y/Y, nevertheless still the highest rate since March 2015 (and 1993 when excluding the impact of consumption tax hikes).

Our colleagues in Tokyo now expect national the core inflation measure (excluding fresh foods) to jump 0.4ppt to 4.1%Y/Y in December, which would be the highest since 1990. But this will likely mark the peak. Indeed, after perhaps moving broadly sideways in January, inflation will fall sharply thereafter due to the government’s support measure for household energy bills. Our colleagues forecast core inflation to drop by almost 1½ppts in February to 2.7%Y/Y and gradually moderate below the BoJ’s 2% target in the second half of the year. Admittedly, due not least to base effects, core inflation will likely rise back at the start of 2024, and our colleagues expect full-year inflation in FY23 to be close to 2%, and arguably high enough for the BoJ to be able to justify further amendments to its policy framework.

Higher prices dampen Japanese household spending
Amid higher prices of essential items, Japanese household spending figures for November came in weaker than expected. In particular, total consumption fell 0.9%M/M, due to marked declines in spending on clothing, household appliances and food. This left spending down more than 1%Y/Y. And when excluding consumption of more volatile items such as housing and cars, core spending dropped 1.8%M/M, the most since May. Admittedly, given strong increases in the previous two months as pandemic-related restrictions were relaxed, this still left core spending trending almost 1½% above the Q3 average. But with consumer confidence still near historically weak levels and real wage growth firmly in negative territory, spending looks set to be subdued over coming months.

BRC survey suggests firmer festive period for UK retailers, but sales still on track for 6th successive quarterly drop in Q4
At face value, the latest BRC/KPMG survey results suggested a merry festive season for UK retailers. Indeed, the survey measure of total sales growth picked up 2.7ppts in December to 6.9%Y/Y, firmly above expectations and the most in eleven months. Like-for-like sales were similarly up 6.5%Y/Y, almost 2½ppts stronger on the month. The survey measure of the value of food sales was up 7.9%3M/Y, continuing to outpace growth in non-food items (up 1.5%3M/Y). However, with the BRC shop price index up 7.3%Y/Y in December, the survey was still consistent with an annual drop in sales volumes in December. And while the BRC figures do at least point to positive growth in sales volumes on a month-on-month basis in December, we caution that they failed to act as a reliable guide to the weakness recorded in the official data in November. Indeed, sales on the High Street (as reported by the survey) appear to have benefited in part from a drop in online sales, in part due to shoppers’ concerns about disruption to deliveries from postal strikes. And overall, retail sales volumes still look firmly on track to contract in Q4 for the sixth successive quarter.

REC survey suggests that UK labour market tightness continues to ease, with demand for permanent staff down and pay growth moderating
According to the REC/KPMG report on jobs, the UK labour market softened significantly further in December as the likelihood of economic recession and uncertainty about the outlook weighed more heavily. According to the recruitment and employment consultancies surveyed, the number of permanent placements dropped for the third month running in December and by the most since the lockdown of January 2021. Growth in vacancies for permanent roles similarly slowed to the softest since February 2021. And staff availability improved to the least restrictive since March 2021. While the number of temporary billings ticked up, growth remained well below that registered from the summer of 2020 through to September 2022. Growth in starting salaries slowed for the ninth successive month to the softest rate since April 2021.

French manufacturing rebounded more than expected in November, but still likely on track for a drop in Q4
After data yesterday reported moderate growth in German production in the middle of Q4, this morning’s equivalent French data reported a much stronger-than-expected rebound from weakness in October. In particular, French manufacturing output leapt 2.4%M/M in November, more than reversing the drop of 2.1%M/M in the prior month. Nevertheless, that left it up just 0.2%3M/3M, and still probably on track for a modest drop over Q4 as a whole. It also left the level of manufacturing output still 2.9% below the pre-pandemic level in February 2020. And with power generation, other utilities and mining and quarrying all weaker, overall industrial production growth was somewhat softer in November (up 2.0%M/M but down 0.8%3M/3M) to be trending more substantively lower over Q4 as a whole.

French manufacturing growth in November was led by a vigorous rebound (up more than 90%M/M!) in production of coke and refined petroleum products following the strike-related sharp drop in October. But growth in the factory sector was still widespread in the middle of Q4, and encouragingly firm in machinery and equipment (5.3%M/M and 1.9%3M/3M) and motor vehicles (3.1%M/M and 0.8%3M/3M). Beyond manufacturing and utilities, construction output dropped 1.2%M/M in November to reverse the growth at the start of the month, but was still up 1.2%3M/3M. Surveys, however, point to a soft end to the year across the French industrial sector with confidence in manufacturing the lowest since the lockdown of January 2021, new orders in retreat, and the outlook for Q1 highly uncertain too.

US small business sentiment likely to have fallen back in December
It should be another relatively quiet day for top-tier US data, with just the NFIB small business optimism survey due for release. Following the slump in last week’s services ISM and contraction implied by the manufacturing ISM, this survey is likely to show that the headline sentiment index slipped back in December. Certainly, there appear to be downside risks to the Bloomberg survey consensus of only a modest decline of 0.4pt to 91.5. 

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