Japan's core inflation at multi-year low

Chris Scicluna
Emily Nicol

Asian stocks firmer on Friday, led by China
As had seemed likely given developments during the Asian session, the resumption of downward pressure on technology stocks saw Wall Street post further losses on Thursday. At the US close the S&P500 was down 0.8%, while the Nasdaq fell 1.3%. Since then, there has been little change in US equity futures or Treasury yields. But in Asia most equity markets made moderate gains, e.g. Japan’s Topix closed up 0.5% while the latest local CPI data came in predictably weak (see below). And Chinese bourses outperformed, up around 2% following two days of losses. On the whole, however, European stocks and government bonds have opened a touch softer, while UK retail sales figures maintained the recent recovery trend (more on these data below too). In the commodity market, crude oil has continued to push higher following Saudi Arabia’s pointed criticism of other OPEC members’ adherence to agreed quotas.

Japan’s core inflation at multi-year low as “Go to Travel” compounds underlying weakness
The only economic report of note released in Japan today was national CPI inflation for August. And while the outcome was soft, even by Japanese standards, this had been well signalled by the advance figures for the Tokyo area released at the end of last month. As a result, all of the key aggregates printed in line with market expectations. The headline CPI fell 0.1%M/M, nudging annual inflation down 0.1ppt to 0.2%Y/Y. And this was despite a 1.2%M/M increase in the price of food, pushing the respective annual rate up to 13.6%Y/Y, the most since 2016.

So, much greater softness was evident in the core measures. The BoJ’s forecast core CPI (which excludes fresh foods) fell 0.4%M/M, resulting in an annual decline of 0.4%Y/Y – the weakest result since November 2016. Meanwhile, the internationally comparable core inflation measure (which excludes both food and energy) fell 0.7ppts to -0.4%Y/Y, and the BoJ’s preferred measure of core inflation (which excludes fresh food and energy) fell 0.5ppts to -0.1%Y/Y – the latter the weakest result since March 2017. And of course, these figures continue to be boosted by last October’s consumption tax hike (albeit offset to a large extent by the government’s fees-free education policy). Indeed, according to the MIC, the BoJ’s forecast core inflation measure fell to -0.8%Y/Y, the weakest reading since September 2010.

Within the detail, consistent with the results from Tokyo, the decline in inflation in August owed to an 18.4%M/M slump in hotel charges – clearly impacted by the government’s ‘Go to Travel’ promotion subsidies – which compounded earlier weakness and left prices down a record 32%Y/Y. Indeed, the decline in inflation in the recreational services sector can account for all of the decline in the BoJ’s forecast core measure in August. Reflecting the impact of the pandemic on travel, airfare prices rose less in August than would normally be the case, leaving them down 6.2%Y/Y. So, overall services prices fell 0.3%M/M in August, leading to an annual decline of 1.0%Y/Y – the weakest outcome in almost a decade. By contrast, while prices fell 0.1%M/M in the goods sector (excluding fresh food), they were still up 0.3%Y/Y. Industrial goods prices also fell 0.1%M/M but were up 0.6%Y/Y (2.0%Y/Y once the impact of lower energy prices is excluded).

So in summary, the particular driver of softness in the August report should prove short-lived (the Go to Travel campaign will likely end sometime early next year). That said, in the near term core inflation is likely to remain negative, especially with last year’s consumption tax hike dropping out of the calculation in October. And beyond that, with the economy still reeling from the economic impact of the pandemic, the prospect of inflation lifting much at all remains doubtful at best – an outlook that will continue to frustrate policymakers.

UK retail sales rise well above pre-Covid level but millions still furloughed
UK retail sales volumes rose for the fourth successive month in August and by a near-consensus 0.8%M/M, to take them 4.0% above February’s pre-pandemic level and 2.8% higher than a year earlier. Compared to Q2, retail sales were on average up more than 17% in July and August, reinforcing expectations that GDP will post growth in that ball-park (and probably slightly above) in Q3. Excluding auto fuel, sales were up 0.6%M/M to be 5.3% above the pre-pandemic level and up 4.3%Y/Y.

Once again, there was a mixed picture within the different store types. While they were up a vigorous 13.4%M/M in August, sales at clothes shops still languished 15.9% below February’s pre-pandemic levels. And while spending for home improvements – likely encouraged by continued widespread working from home – rose at a more moderate 1.9%M/M, that pushed it almost 10% above February’s level. Spending on furniture, lighting and electrical goods was up at a similar pace from before the pandemic, and spending on hardware, paints and glass was up almost 13% on the same basis. In addition, while online retail sales fell 2.5%M/M they were still 46.8% above the pre-pandemic level.

Looking ahead, retail sales seem likely to remain above February’s level, not least as people continue to spend less on eating out and thus more on eating at home. And with spending on transport and a range of ‘social’ services set to remain subdued – particularly against the revival in the pandemic and more local lockdowns, spending on household goods might remain firmer too. Nonetheless, total private consumption will likely remain some way below its pre-Covid level heading into 2021, particularly as the shakeout in the labour market has only just begun.

Indeed, the ONS’s latest Business Impact of Coronavirus Survey results, also released this morning, suggested that 10% of the workforce (more than 3mn people) were still on furlough during the period of 24 August to 6 September. And, of course, the Government’s Job Retention Scheme will conclude at the end of next month. While new targeted measures to support furloughed workers in the worst affected sectors should be expected, the unemployment rate is likely to jump sharply by year-end, weighing on consumer confidence and spending.

German producer price deflation eases on smaller energy drag
German producer price inflation numbers for August, also released this morning, showed a moderation in the year-on-year decline last month, by 0.5ppt to -1.2%Y/Y. But this still marked the seventh consecutive drop, with the improvement merely reflecting a smaller drag from energy prices. Indeed, when excluding energy, producer prices were still down 0.4%Y/Y, unchanged for the fourth consecutive month, suggesting (unsurprisingly) that underlying price pressures down the pipeline remain subdued.

Looking ahead, a quieter day for euro area economic releases will bring just the ECB’s balance of payments figures for July, along with Italian industrial orders and sales data for the same month. Among other things to watch, ECB Vice President de Guindos and Executive Board member Schnabel are scheduled to speak publicly at separate online events.

US focus on consumer confidence at the end of the week
In the US, finally, today will bring the preliminary University of Michigan’s consumer sentiment survey for September, which is expected to tick higher thanks to elevated stock markets and the gradual improvement in the labour market. But this would still leave the headline indicator only marginally higher than the post-pandemic trough and well below levels (circa 100) seen at the start of the year. This afternoon will also bring the Conference Board’s leading index for August, as well as the latest current account balance for Q2. Meanwhile, FOMC voting member Kashkari (who at the meeting earlier this week insisted that the Fed should indicate that there would be no policy tightening until core inflation had reached 2% on a sustained basis) is due to speak this afternoon, albeit on the topic ‘too big to fail’.

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