The current acceleration of the inflation rate creates a complex situation in the United Kingdom as it weighs on households’ purchasing power.
In April the inflation rate was at 2.7% and the core inflation rate was at 2.5%. The inflation rate has not been so high since the fall of 2013 and november 2012 for the core rate. This is mainly the impact of the depreciation of the currency after last june referendum on Brexit.
A year ago the inflation rate was at 0.3% and the core inflation rate was at 1.2%. This latter magnitude is worrisome as the economy is not growing more rapidly.
The main issue is that wages momentum will not follow the inflation profile. Continue reading
The inflation rate was at 2% in February after 1.8% in January. It’s the highest record since January 2013. The core inflation is stable at 0.9%. It means that energy is the main driver for the higher inflation rate.
The first graph shows that the core inflation rate is stable since 2014 and the volatility of the inflation rate is associated with the oil price yearly change.
The oil price effect has started to diminish. The second graph shows the consistency between the yearly change in oil price (blue) and the energy contribution to the inflation rate (purple). We see that the oil price change has peaked in January and will follow the red line which shows the oil price yearly change when the oil price is at 55USD and the exchange rate at 1.06.(the last point is June 2017)
The oil price impact will be transitory and the energy contribution will start decreasing in April probably as there is persistence and delay between the oil price and contribution.
In other words, after the current peak, the inflation rate will converge to the core inflation rate (circa 1%).
This temporary effect of oil price on inflation is a strong incentive for the ECB to keep its monetary policy stance unchanged.
The Euro Area inflation rate jumped at 1.8% in January after 1.1% in December 2016.
The graph below shows the cumulated contributions to the inflation rate. It can be read in the following manner: the red line is the goods price contribution to the inflation rate; the blue line is the sum of the red line plus the services price contribution to the inflation rate; the green line is the sum of the blue line and of the food price contribution to the inflation rate. Alle these prices represent more than 90% of the Consumer Price Index. The green line is almost stable; its range is 0.6% – 0.85% since mid-2014. There is no surge in inflation through all these prices.
The last line, the purple one, is the sum of the green line and of the energy price contribution to the inflation rate. Continue reading
The stabilization of the oil price around USD 50 implies that the contribution of the energy sector to the inflation rate converges currently to 0.
In October for the Euro Area, this contribution was only -0.09%, its highest number since June 2014. The profile is the same in the US.
The point is simple. The current oil price is comparable to the price seen one year ago. This wasn’t the case since mid-2014. Therefore the energy contribution to the inflation rate was systematically negative as the oil price was lower than a year before. As prices are currently comparable the contribution converges to 0 Continue reading
The inflation rate was 1.1% in August, close to the average seen since the beginning of the year (1.1%). The core inflation rate was at 2.3% the highest number since last February.
The surge in the core inflation rate can be decomposed between Housing and the rest of the index.
The following graph shows the Housing contribution to the inflation rate and the core rate contribution to the inflation rate. The Housing contribution explains more than 60% of the core contribution to the inflation rate. This the weight of the housing sector that makes a difference with the PCE index followed by the US central bank. It corresponds to a very different methodology. This means that all the other components of the core price index explain only 40%.
In the 40% it is interesting to see each sub index contribution. We see a strong contribution from the Health price index. All the other contributions are low and some are declining.
OK the core inflation rate is up to 2.3% but only through strong contributions from the Housing sector and from the Health sector. The first reflects the higher real estate price and a catch up effect. The real estate adjustment seen on the graph below is beyond the CPI issue. The Health index price is up but this is not a market price.
As all the other sub indices in the core price index are not accelerating we can say that the core inflation rate has a bias on the upside linked to Housing and Health but this doesn’t reflect tensions inside the US economy. That’s why the Fed must be careful in the way it takes this index (which is not its favourite) into account.
April inflation rate was 1.2% in the Euro Area. This rapid drop needs an answer from the ECB as this level is well below its target (inflation rate stable but slightly below 2%)
The main reason for this lower inflation rate is the energy price contribution that went to 0 in April. If as the IMF said last month global growth momentum does not accelerate, this contribution will remain low as no pressures are expected on oil price (except may be in June as price was much lower last year but it was temporary, see chart at the bottom of this post).
On the first chart, services and good sectors contributions are low and will remain low as far as economic prospects in the Euro Area de not improve strongly.
With low pressure from the global outlook and from the weak economic situation in the Euro Area, inflation rate will remain low, well below the ECB commitment.