Global Inflation Update: Oil Slump Effects Gone?

Most economies got a shock when oil prices slumped hard last year, putting deflationary pressure across the globe. But now that some time has passed and oil prices have stabilized, have the major economies absorbed that shock? Let’s find out!

May CPI

May CPI

We’ve finally got the May consumer price index (CPI) data for China, Switzerland, and the Euro Zone. And based on the tables above, it is clear that the euro zone is showing some signs of “green shoots,” while China is mixed with lower headline CPI against a slight increase in the core CPI data (mainly energy and food prices). Switzerland, meanwhile, is in the red, thanks to lower import costs brought about by an appreciating Swissy versus the Euro when the SNB floor on EUR/CHF at 1.2000 was removed back in January 15.

Going back to China, headline CPI is decreasing and has been decreasing due to China’s slowing economy. This is why China cut rates back in May, although China keeps insisting that it was meant to promote investment and growth. Still, China’s core CPI has been pretty stable and even saw a slight uptick, which is always a good sign.

As for the euro zone, the ECB has taken credit for that uptick, claiming in the recent press conference that the €1.1 trillion quantitative easing program is “proceeding well.” In my opinion, it’s still too early to say that a true recovery is underway but green shoots are always welcome. Time will tell us soon enough if the uptick was caused by the quantitative easing program or just a fluke. Also, we still have Greece to worry about.

Moving on, we won’t be getting the May CPI data for the U.S., the U.K., Canada, and Japan until next week (June 30 for Japan), so let’s take a look at their inflation data for April instead.

April CPI

April CPI

Forex Gump! Forex Gump! Did you make a mistake on that table? How come Japan is in the green when the recent figure is much lower than the previous figure? That’s because Japan’s consumption tax made stuff more expensive, providing an artificial boost to inflation. If we take that consumption tax into account, then the previous headline CPI reading should be 0.3% while the previous core CPI reading would be 0.2%, which make the recent readings better than the previous ones.

Moving on, the headline CPI data for both the U.S. and Canada look bad, but the core CPI readings from both countries negate these since they’re still pretty solid, with the reading for U.S. core CPI holding on at 1.8% while the Canadian core CPI slid down a wee bit to 2.3%.

The U.K., on the other hand, is a different story. Headline CPI is finally in negative territory, but the BOE has already forecasted this in the May 14 inflation report. BOE Governor Mark Carney also emphasized that this dip into negative territory would be temporary and that inflation should be in positive territory again by the end of the year. We’ll see, shall we?

Going forward, Australia and New Zealand are the odd kids on the block because they prefer to report their inflation data on a quarterly basis. The updated inflation data for Australia and New Zealand would be released on July 22 and July 15 respectively, but until then, let’s work with what we have.

Quarterly CPI

Quarterly CPI

Looking at the tables, it’s clear that Australia is doing better than it’s neighbor, especially with regard to core inflation. Looking at inflation-related data presents the same conclusion as well. The Australian labor market was generally more robust than New Zealand’s labor market.

Q1 2015 Australian PPI has also been picking up, posting a better-than-expected reading of 0.5% (0.1% previous) and hinting at a future pickup for CPI. New Zealand’s Q1 2015 PPI, meanwhile, was worse-than-expected at -0.9% (-0.1% previous), showing that deflationary pressures are still strong and hinting at further disappointments for future CPI data.

And remember, the RBA cut rates back in May because of slack in the labor market and consumer spending. Now that labor market conditions are showing signs of an improvement, the RBA switched to wait-and-see mode. As for New Zealand, the RBNZ stated that one of the primary reasons for the recent rate cut was weak inflationary pressure, stating that the “weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed.”

So what’s the gist of it all? Well, it seems like most economies have already absorbed the slump in oil prices, with some economies already showing green shoots. If inflation is not picking up, it’s for a variety of reasons particular to each economy. (e.g., China’s economic slowdown, Switzerland’s unexpectedly strong currency, etc). Overall, the apparent stabilization in food and energy prices is a positive sign, one that may hold off further central bank rate cuts for now, but we may still be a few quarters of data away from saying that deflationary and growth fears are behind us.