This week the focus is on inflation as we review some of the latest inflation data from a selection of key economies. First we look at a revival in U.S. inflation, then review the situation up in Canada, then we look at the inflation situation in the Euro Zone, before finishing up with a look at the BRIC economies. Following that is a review of some of the key monetary policy decisions over the past week.
1. U.S. Inflation
The U.S. recorded annual headline inflation of 2.2% in February, up from the 1.7% rate seen in January (up 0.5% month on month). Core inflation also continued its climb, rising to 1.1% from a low of 0.6% in October last year. The key driver of the rise in headline inflation was commodity prices, but specifically energy prices - with energy up 11% (no surprise given the recent run up in oil prices). The main takeaway from the result was a confirmation that the inflation situation in the U.S. is starting to see greater inflationary pressures due to the transmission of rising commodity prices. The base case still seems to be one of higher or normalized inflation, but with a possibility of lower inflation or deflation if commodity prices drop back - but then you can't count out even higher inflation either - especially if the recovery really starts to gain traction and momentum.
2. Canada Inflation
To the north in Canada inflation came in at 2.2% for the 12-months to February (up 0.3% month on month), slightly lower than the 2.3% seen in January. The main driver of inflation in Canada has been energy costs, with gasoline prices up 15.7%, but the transportation component also tracked upwards, rising 5.1% from February, and alcohol and tobacco rising 2.7%. The core inflation figure in February was 0.9%. Thus the trends are relatively similar to that of the U.S., with commodity prices driving up inflation, but also a gradual rise in aggregate demand. The Bank of Canada has remained in pause mode after hiking rates three times last year, it is reasonably likely that the Bank may begin to recommence the monetary policy normalization process later this year.
3. EU Inflation
The EU recorded inflation of 2.4% in February, up from 2.3% in January, with the broader region recording 2.8% inflation, unchanged from January. EU core inflation came in at 1% after hovering around the 1-1.1% mark for the past few months. The lowest annual rates came from Ireland (0.9%), Sweden (1.2%), and France (1.8%), with the highest rates seen in Romania (7.6%), Estonia (5.5%), and Bulgaria (4.6%). The key contributors were housing (up 4.9%), transport (up 5.7%), and alcohol and tobacco (up 3.5%). As noted by the ECB when it put its tough stance on inflation forward in its latest meeting, inflation is tracking up in the Euro Zone, and it is primarily being driven by commodity prices - rather than by a significant improvement in aggregate demand. The ECB is concerned about second round effects on core inflation, and rightfully so.
4. BRIC Inflation
Looking abroad to the major emerging market economies, the BRIC (Brazil, Russia, India, China) economies have seen inflation rise to much higher levels than their developed market counterparts. Sure, on average the BRIC economies have a higher weighting to food prices in their indices (and rightfully so), so some of the high inflation is a result of last year's surge in agricultural commodity prices. But unlike the developed markets, the BRIC economies have broadly experienced pretty strong economic growth, so the aggregate demand side of the equation is having a significant effect on inflation too. This of course gives rise to policy risk for those markets, with India and China both announcing further monetary policy tightening moves last week.
5. Monetary Policy Review
The main events in monetary policy over the past week were: India increased rate +25bps to 6.75%, Chile increased +50bps to 4.00%, and Colombia increased +25bps to 3.50%, Japan expanded its asset purchase program another 5 trillion Yen in response to the unfolding natural and nuclear disasters, and China raised the required reserve ratio another 50 basis points - placing the rate at 20% for the larger banks. So for the most part it was the same old story of emerging market economies raising rates in response to higher inflation. But, some of the Banks like Norway and Switzerland made comments about the need to normalize policy in the near term... in other words more and more central banks are starting to talk about rising inflation, so this may well be the part where we start to see inflation as a global theme rather than an emerging market theme.
So we saw the U.S. with rising headline and core inflation, showing that inflationary pressures are well entrenched for now. Up in Canada, inflationary pressures were likewise tracking along, likewise driven by the surge in commodity prices - but particularly energy prices. Over in the EU, the ECB's comments on inflation were confirmed by higher headline inflation, and it is right to worry about the second round effects of rising commodity prices. In the BRIC economies, the distinction is made that inflation is not just a supply side - commodities thing, it is also an aggregate demand thing. Thus we continued to see monetary policy tightening by emerging market central banks, but we also started to see greater vigilance on inflation from developed market central banks. So the question arises; has inflation now progressed from an emerging market theme to a global theme?