ECRI International Future Inflation Indexes Show No Inflationary Pressure

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 |  Includes: EWG, EWI, EWJ, EWP, EWQ, EWU, EWY, FXE, IEV
by: Steven Hansen

The Economic Cycle Research Institute (ECRI) has released its January 2009 Future Inflation Gauge (FIG) for Europe, U.K., Japan, and Korea. The value of these FIG indexes lies in their ability to predict cyclical turns in inflation.

The evaporation of inflationary pressures as demonstrated by ECRI’s indexes is continuing to allow major economies further reductions in interest rates.

The ECB (European Central Bank) has reduced interest rates to 1.5% (drop of 50 basis points). This ECRI release follows the Bank of England rate cut (six cuts since October 2008) to reduce benchmark interest rates (down 50 basis points to 0.5%). The rate of the Bank of Japan’s rate is currently at 0.1% which is essentially zero. Bank of Korea benchmark rate was reduced to 2.0% (50 basis point drop) in mid-February 2009..

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Eurozone

ECRI’s Eurozone Future Inflation Gauge (EZFIG) continued to fall in January. The EZFIG declined to 88.8 (1992=100) in January from 90.4 in December, as did its smoothed annualized growth rate to -27.0% from -26.5%. The EZFIG was pulled down by the simultaneous plunge in inflationary pressures in Germany, France, Italy and Spain.

Consumer prices in the Eurozone have turned down sharply, as anticipated by the earlier plunge in the EZFIG. With the EZFIG falling to an all-time low in its latest reading, consumer prices are set to fall further in the coming months.

  • Germany –German inflationary pressures fell further in January, according to ECRI's German Future Inflation Gauge (GFIG). The GFIG dropped to 83.5 (1992=100) in January from 85.6 in December, as did its smoothed growth rate to -38.1% from -37.2%. The gauge was pulled down by negative contributions from measures of interest rates, loans, orders and labor market conditions, partly offset by positive contributions from measures of materials prices and money supply. German inflation has receded substantially, as predicted by the earlier plunge in the GFIG. With the GFIG falling to its lowest reading in over three years, it is likely that German consumer prices will retreat further in the months ahead.
  • France French inflation pressures continued to decline in January, according to ECRI’s French Future Inflation Gauge (FFIG). The FFIG inched down to 99.6 (1992=100) in January from 99.9 in December, as did its smoothed growth rate to -5.0% from -4.9%. The gauge was pulled down by negative contributions from all available components, except for a measure of orders, which moved in an inflationary fashion. As anticipated by the earlier steep drop in the FFIG, French inflation has fallen off sharply. With the FFIG continuing to retreat, reaching a 12-year low in its latest reading, French consumer prices will likely continue to fall.
  • ItalyItalian inflationary pressures ticked down in January, according to ECRI’s Italian Future Inflation Gauge (IFIG). The value of the IFIG lies in its ability to anticipate cyclical turns in Italian inflation. The IFIG slipped to 97.8 (1992=100) in January from 97.9 in December, though its smoothed annualized growth rate ticked up to -7.1% from -7.7%. The gauge was pulled down mainly by a negative contribution from a measure of interest rates, partly offset by positive contributions from measures of money supply and supplier deliveries. Italian inflation has dropped noticeably from its mid-2008 highs, as anticipated by the earlier cyclical downturn in the IFIG, which reached a seven-year low in January. Thus, Italian consumer prices will likely fall further.
  • Spain– ECRI’s Spanish Future Inflation Gauge (ESFIG) plummeted further in January. The ESFIG plunged further to 62.5 (1992=100) in January from 67.7 in December, as its growth rate fell to -64.7% from -62.0%. The gauge was pulled down by negative contributions from measures of producer prices and interest rates, partly offset by a positive contribution from a measure of orders. Spanish consumer prices have receded dramatically in recent months, as predicted by the earlier drop in the ESFIG. Meanwhile, with the ESFIG continuing its sharp cyclical decline, Spanish consumer prices are likely to fall further in the coming months.

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Japan

ECRI’s Japanese Future Inflation Gauge (JFIG) rose slightly in January. The JFIG edged up to 97.6 (1992=100) in January from 97.3 in December, as did its smoothed annualized growth rate to -1.4% from -2.2%, due to positive contributions from measures of money supply and labor market conditions, mostly offset by negative contributions from measures of commodity prices and import prices.

Japanese inflation has plunged since last summer, as anticipated by the earlier downturn in the JFIG. Meanwhile, with the JFIG remaining close to December’s five-year low, the decline in Japanese consumer prices is likely to continue.

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Korea

Korean inflationary pressures fell further in January, according to ECRI's Korean Future Inflation Gauge (KFIG). The KFIG decreased to 94.8 (1992=100) in January from 95.3 in December, as its smoothed annualized growth rate slipped to -9.9% from -9.8%, due to disinflationary moves in measures of employment, interest rates and import prices, partly offset by an inflationary move in a measure of producer prices.

Korean inflation remains in a clear cyclical downturn, as predicted by the earlier plunge in the KFIG. Meanwhile, with the KFIG plummeting to a historical low in January, Korean inflation is likely to continue its decline in the coming months.

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United Kingdom

ECRI's United Kingdom Future Inflation Gauge (UKFIG) remained in a cyclical downturn in January. The UKFIG was unchanged at 100.3 (1992=100) in January, though its smoothed annualized growth rate edged up to -15.1% from -16.3% in December, as negative contributions from measures of interest rates, unemployment, money supply and loans were essentially neutralized by positive contributions from measures of raw material prices and vendor performance.

U.K. consumer prices have been falling in the wake of the plunge in the UKFIG, which remains at a 15-year low. Thus, consumer prices are poised to fall further.

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