Global Inflation Update: Energy Prices Still A Drag?

What’s goin’ on forex friends? The forex market treatin’ you right? I sure hope so! In any case, I’ve compiled the most recent inflation readings for the major economies, so gear up by reading up if you’ve been fallin’ behind on your research. After all, knowledge is power (and profits) in the forex world.

Oh the inflation readings for Australia and New Zealand aren’t included in this report since they report their inflation readings on a quarterly basis. If you wanna know how those economies are doing, you can always check out my previous inflation round-up write-up.

Forex - Headline CPI (July)

Headline CPI (July)

Forex - Core CPI (July)

Core CPI (July)

As y’all can see, there were more gainers than losers among the major economies for the month of July, with the euro zone being the only economy that got stuck in limbo.

Let’s start off with the euro zone. The euro zone’s annual headline inflation remained steady at 0.2% while the core reading actually saw an increase. Looking at the components of the report, lower energy prices continued to drag down inflation levels in the euro zone, with fuels for transport declining by 0.43% and heating oil by 0.06%. These were offset by a 0.09% increase in restaurants and cafes, a 0.06% increase in rents, and a 0.08% price increase for alcoholic and tobacco products.

Forex - EU Members' CPI

Source: Eurostat

Among the major euro zone economies, Germany’s inflation levels remained rather low at 0.1% (+0.1% previous) while Spain’s was flat (-0.1% previous). France, in the mean time, saw a downtick from 0.3% to 0.2% while the opposite occurred in Italy since inflation levels there increased to 0.3% (+0.2% previous). And if you’re interested, Greece’s inflation levels decreased from -1.1% to -1.3%. Cyprus is till got it worst, though, since it printed a -2.4% (-2.1% previous), but Cyprus only has a minor contribution to the euro zone economy.

Moving on to the other economies, Switzerland and Japan were the two losers, although Switzerland appears to be the bigger loser since both headline and core readings are in negative territory. Deflationary pressure among the sub-components was rampant and lower energy prices still seem to be a problem since housing and energy prices fell by 0.5% (-0.4% previous) while transport prices dropped by 4.8% (-3.7%).

Of course, the true source of Switzerland’s deflationary woes is still the strong Swissy caused by the removal of EUR/CHF’s floor back in January of this year, which caused the Swissy to appreciate intensely. Swiss National Bank Governing Board Chairman Thomas Jordan even said as much in a recent panel discussion at the Jackson Hole Symposion. Specifically, he said “While the Swiss franc is an asset to the Swiss economy, its strength has repeatedly put pressure on the export sector and the consumer price level.” There ya go! Straight from the horse’s mouth… figuratively speaking, of course.

As for Japan, energy-related components are also a major source of deflationary pressures. The cost of electricity, for instance, dropped by 3.8% year-on-year (-1.5% previous) while the “other fuel and light” component dropped by a gobsmacking 21.4% year-on-year (-21.1% previous). The transportation sector, which relies heavily on oil products, saw a 2.3% drop (-2.0% previous ). The private transportation sub-component got hit the hardest, slumping by 4.2% (-3.5% previous). Looking forward, the future ain’t too bright for Japan since household spending for July was down by 0.2% in real terms despite monthly household income increasing by 5.4% in real terms, probably because of that nasty 8% consumption tax.

This theme of deflationary pressure from energy-related components continues even among the gainers. The main drag in China, for example, was the 1.5% slide in the “transportation and communication” component due to a massive 16.1% drop in the “fuels and vehicle parts” sub-component.

Forex - Chinese CPI Contributions

Source: National Bureau of Statistics of China

In the U.S., it’s the 14.8% year-on-year drop in the energy sector while in Canada it’s the 1.7% year-on-year drop in its transportation index.

Forex - Canadian CPI Contributions

Source: Statistics Canada

The U.K. is more quirky since it was also suffering from lower prices for food and alcoholic drinks due to cheaper import prices brought about by the stronger pound. And the Bank of England (BOE) kept emphasizing the pound’s strength in their latest inflation report. The BOE even mentioned that “the drag on import prices from [the pound’s] appreciation will continue to push down on inflation for some time to come.”

Forex - U.K. CPI Contributions

Source: Office for National Statistics

Overall, energy prices still seem to be a major deflationary factor, although each economy has it’s own special problems. The U.K. and Switzerland, for example, are getting hammered because both of their currencies have been strong recently, making imports cheaper and dampening inflation levels in the process.

Forex - Brent Crude Oil Daily Chart

Brent Crude Oil Daily Chart

Will we see lower inflation levels in the future? Possibly. After all, crude oil prices have been dropping further after stabilizing (and even rising) for a while. But oil prices have also recently staged a spectacular two-day rally  due to a number of perceived risks that could threaten oil supplies. Whether these perceived risks are material are or not and whether the rally will have some follow-through or not still remains to be seen.