A post in February suggested that deflation worries were overblown and that “core” consumer price inflation would remain stable in 2015. Recent news has played to this script.
Core CPI inflation, indeed, has risen slightly since the start of the year in the US, Japan, the Eurozone and China – see first chart. The main exception to the trend has been the UK, where a 10% increase in sterling’s effective index since end-2013 has acted as a significant dampener.
US core CPI inflation is under upward pressure from rising growth of housing rents – see yesterday’s post. Weakness in goods prices, meanwhile, may abate: producer price inflation of core consumer goods is well above the corresponding CPI rate and has moved higher recently – second chart.
Japanese core CPI inflation is underpinned by rising pay growth: the annual increase in scheduled wages climbed further in June, with a change in the timing of bonus payments explaining a fall in total pay – third chart.
The uptick in core CPI inflation in China contrasts with continued weakness in producer prices, suggesting that the latter reflects commodity price falls, a rising exchange rate and the economy rebalancing away from heavy industry, rather than significantly restrictive monetary conditions.
Bond market inflation expectations collapsed in tandem with commodity prices in late 2014 as the deflation scare took hold. The recent response to further commodity price weakness has been much smaller, suggesting market recognition of core inflation resilience – fourth chart.
