29 Apr 2016
Are we missing the turn in inflation? – Nomura
Research Team at Nomura, suggests that the recent weak Australian CPI number greatly increases the possibility of a move at next week’s RBA meeting (3 May).
Key Quotes
“The market is now pricing a close to 50% chance of a cut at the meeting compared with close to zero before the release.
The cluster of central bank events could make us lose sight of broader macro trends that could affect central bank policy. An obvious one is that the year-on-year change in oil prices is currently around -25% compared with -45% in February. If oil prices stay around current levels, then by July the year-on-year change will be 0% as base effects kick in. This would have a major impact on headline inflation numbers around the world. This could make central bank easings today look excessive later in the year.
Of course, one could ignore headline inflation and instead focus on core inflation, which strips out food and energy prices. There we find that core inflation for Norway is running at 3.7%, the US at 2.2% and Australia at 2%. Admittedly, the trend in Australian inflation has now been damped, but that cannot be said for Norway and the US. Other rising trends in core inflation can be seen in Sweden, the UK and the euro area.
It is noteworthy that real interest rates are heavily negative in both Sweden and Norway. The output gap in Sweden is also estimated to be positive, which turns the spotlight back on to whether either Sweden’s interest rates or its currency are too low (or both). Norway’s output gap is heavily negative, but with core inflation so high, it may suggest that the output gap may not reflect the true structure of the economy or that imported inflation through a weak currency has distorted the picture.
Like Sweden, the UK’s output gap appears to have closed, and with core inflation edging higher it could bring renewed focus on whether BoE policy is tight enough after the EU referendum. This could be positive for the pound.
Finally, as an aside, it is interesting that for all the talk of deflationary Japan, its core inflation is similar to that seen in New Zealand and the euro area. In fact, Switzerland is the true deflationary country.”
Key Quotes
“The market is now pricing a close to 50% chance of a cut at the meeting compared with close to zero before the release.
The cluster of central bank events could make us lose sight of broader macro trends that could affect central bank policy. An obvious one is that the year-on-year change in oil prices is currently around -25% compared with -45% in February. If oil prices stay around current levels, then by July the year-on-year change will be 0% as base effects kick in. This would have a major impact on headline inflation numbers around the world. This could make central bank easings today look excessive later in the year.
Of course, one could ignore headline inflation and instead focus on core inflation, which strips out food and energy prices. There we find that core inflation for Norway is running at 3.7%, the US at 2.2% and Australia at 2%. Admittedly, the trend in Australian inflation has now been damped, but that cannot be said for Norway and the US. Other rising trends in core inflation can be seen in Sweden, the UK and the euro area.
It is noteworthy that real interest rates are heavily negative in both Sweden and Norway. The output gap in Sweden is also estimated to be positive, which turns the spotlight back on to whether either Sweden’s interest rates or its currency are too low (or both). Norway’s output gap is heavily negative, but with core inflation so high, it may suggest that the output gap may not reflect the true structure of the economy or that imported inflation through a weak currency has distorted the picture.
Like Sweden, the UK’s output gap appears to have closed, and with core inflation edging higher it could bring renewed focus on whether BoE policy is tight enough after the EU referendum. This could be positive for the pound.
Finally, as an aside, it is interesting that for all the talk of deflationary Japan, its core inflation is similar to that seen in New Zealand and the euro area. In fact, Switzerland is the true deflationary country.”