Euro area final inflation set to confirm the temporary pickup in headline rate reported in the flash release, but a further easing in underling price pressures
The euro area calendar will bring several releases of note this week, including updated readings of December inflation (Wednesday) and the account of the ECB’s December policy-setting meeting (Thursday), which might well provide greater insight into the debate on the decision to accelerate quantitative tightening, by halving the reinvestments of its proceeds from maturing PEPP bond holdings from July. Further colour on Governing Council members’ readiness to respond over coming months to the recent weakening in economic activity and easing of inflation pressures would also be welcome.
In terms of price pressures, the flash HICP estimates saw euro area headline inflation jump 0.5ppt to 2.9%Y/Y in December due to energy base effects associated not least with the German government’s one-off support payments in December 2022. In contrast, core HICP inflation eased a further 0.2ppt to a 21-month low of 3.4%Y/Y, led by a drop in non-energy industrial goods inflation to a 23-month low of 2.5%Y/Y. The forthcoming release will provide additional granular detail, along with additional measures of underlying inflation. Ahead of this, the results of the ECB’s consumer survey for November (tomorrow) will be watched for progress in reducing medium-term inflation expectations, which had previously moved sideways at 2.5%Y/Y for three consecutive months.
In terms of economic activity, euro area industrial production and goods trade (today) and construction activity figures (Thursday) are due for November. Equivalent IP numbers (excluding construction) already published by member states, including Germany (-0.3%M/M), France (+0.5%M/M), Italy (-1.5%M/M), and Spain (+1.1%M/M), suggest that aggregate euro area production fell for a fifth month out of the past six, by 0.3%M/M. Meanwhile, consistent with recent downbeat surveys, and given sharp contractions in Germany (-2.9%M/M) and France (-1.0%M/M), euro area construction looks set to drop for a third month out of the past four. Separately, the estimate of full-year German GDP growth in 2023 (today) and the January ZEW investor survey (tomorrow) are also due.
UK inflation expected to have maintained modest downtrend, while wage growth is expected to have moderated further too
The week ahead will be a busy one for top-tier UK economic data, including the latest developments in the labour market (tomorrow), inflation (Wednesday) and retail sales (Friday). Having eased to a 26-month low in November, we expect headline inflation to edge only slightly lower in December, by 0.1ppt to 3.8%Y/Y. This would leave inflation at 4.1%Y/Y in Q4, double the MPC’s target but nevertheless some 0.5ppt below the BoE’s forecast published in November. The slowdown will in part reflect a sharp drop in petrol prices. But with services inflation also expected to ease slightly to a fifteen-month low of 6.2%Y/Y, core inflation might well similarly fall 0.1ppt to 5.0%Y/Y, which would be the lowest since January 2022.
November’s labour earnings figures might also provide some encouragement with respect to domestically generated inflationary pressures. Indeed, single-month wage growth in October fell to a seven-month low, while PAYE data suggested that median pay growth in November fell to its weakest rate for more than two years. Meanwhile, in the absence of the official Labour Market Survey, the claimant count and HMRC payrolled employee figures will provide a guide to the current tightness of the labour market. In terms of household spending, surveys strongly suggest that retail sales disappointed at the end of the year. So, having risen in November at the fastest pace since January, we expect retail sales to fall on the month to be down in Q4 for a second successive quarter. In addition, the coming week will bring the results of the BoE’s latest credit conditions survey for Q4 and the RICS residential survey for December on Thursday.
Japanese inflation expected to have eased to an 18-month low in December and input costs decline
Like in the euro area and UK, December inflation figures will also be a key focus in Japan (Friday). Tokyo CPI figures saw the headline rate fall 0.3ppt to an 18-month low of 2.4%Y/Y that month, 2ppts below the peak at the start of the year. The national headline rate is similarly expected to ease 0.3ppt to 2.5%Y/Y, which would be the softest since June 2022, while the core rate (excluding fresh foods) is expected to drop 0.2ppt to 2.3%Y/Y. But the BoJ’s preferred core measure – excluding fresh foods and energy – is forecast to moderate just 0.1ppt to a still elevated 3.7%Y/Y. And when excluding food and energy, the internationally comparable measure of core inflation likely moved sideways for a fifth month out of the past six at 2.7%Y/Y. Meanwhile, tomorrow’s release of December goods producer price figures is likely to emphasise the waning inflationary impulse from input costs, with the headline annual rate forecast to slip into negative territory for the first time since February 2021. In terms of activity data, the second half of the week will bring revised November industrial production (Thursday) and tertiary activity data (Friday). The preliminary IP release saw manufacturing output decline 0.9%M/M, while tertiary output is expected to increase just 0.1%M/M, following two consecutive monthly contractions.
Retail sales, IP, housing starts & consumer confidence to come this week in the US
After today’s national holiday and a quiet day for economic data releases tomorrow, Wednesday will be the most notable day this week, bringing December’s reports for retail sales, industrial production and export and import prices, as well as the Fed’s latest Beige Book. Daiwa America’s Larry Werther expects total retail sales to rise 0.4%M/M, a touch more than in November, thanks in particular to firm growth in the autos component. Excluding autos, however, he expects growth of just 0.2%MM, as lower prices are likely to have weighed on the value of gasoline sales, while core sales might have been relatively subdued (0.3%M/M) as payback for strength in the autumn. Meanwhile, consistent with restrained job growth in the sector and a drop in the average work week, Larry expects manufacturing output (-0.1%M/M) and overall IP (-0.2%M/M) to post modest declines. Further ahead, Thursday’s focus will be December housing starts, which are likely to decline markedly following the surge of almost 15%Y/Y the prior month. Larry expects a drop of a little more than 10%M/M, not least as builders face up to elevated inventories. Finally, Friday’s focus will be the January University of Michigan consumer sentiment survey. Larry suggests that concerns about a slowing job market and uncertain economic outlook could push the headline confidence index lower this month having in December jumped to the upper end of last year’s subdued range.