Japanese inflation at 3-year high, but data miss expectations and core measures remains very weak
After the BoJ earlier this week assessed that the risks to the inflation outlook were no longer skewed to the downside (for the first time since 2014), today’s CPI numbers were broadly disappointing. Admittedly, headline inflation rose in December, by 0.2ppt to 0.8%Y/Y, to its highest for more than three years (when excluding the impact of the 2019 consumption tax hike). But this was still shy of expectations. And the increase was fully accounted for by higher food inflation which rose to its highest since May 2020 (+2.1%Y/Y) as inflation of fresh foods jumped almost 5ppts to 8.0%Y/Y. Despite an easing in gasoline prices, energy inflation also edged higher in December, by 0.8ppt to 16.4%Y/Y, the strongest rate since 2008.
Within the core detail, despite some evidence of supply-side pressures on certain items (e.g. prices of television sets rose by the most since 2016), household durable goods inflation fell a striking 7.3%Y/Y in December to leave non-energy industrial goods inflation down a further ½ppt at -0.7%Y/Y, the weakest since June 2017. And services inflation fell to -1.9%Y/Y, the weakest since the series began 50 years ago. Of course, much of this weakness is the consequence of policy, including the reduction in mobile phone charges which is still subtracting almost 1½ppts from headline inflation. But while base effects from the government’s travel subsidy scheme saw hotel prices still 44% higher than a year ago, this was down from an increase of 58%Y/Y in November and therefore added a smaller contribution to services inflation last month.
As such, the main core inflation rates remained disappointingly weak. The BoJ’s forecast measure of core inflation (excluding fresh foods) merely moved sideways in December at 0.5%Y/Y. And when excluding all food and energy, the internationally comparable rate of core inflation fell 0.1ppt to -1.3%Y/Y, the weakest since March 2011 when the Great East Japan quake struck, and a far cry from equivalent core rates in the US (4.5%Y/Y), UK (4.2%Y/Y) and even the euro area (2.6%Y/Y). Admittedly, there has been some tentative signs of broadening price pressure over recent months, e.g. the BoJ’s trimmed mean CPI estimate rose in November to 0.8%Y/Y, the highest since February 2018. Moreover, as and when the temporary distortions related to the mobile phone charges and travel subsidies fall out of the calculation, we should see core inflation edge higher from the spring and back into positive territory. But our colleagues in Tokyo expect the BoJ’s forecast measure to peak at just 1.3%Y/Y in April and fall back below 1.0%Y/Y in Q3 and remain there thereafter.
UK retail sales drop more than expected at year-end as Covid, inflation and supply shortages bite
UK retail sales fell sharply at the end of last year. In particular, sales in December dropped 3.7%M/M in real terms, the most in eleven months, to a nine-month low. That left them still some 2.6% above the pre-pandemic level in February 2020 but 6.9% below last April’s peak, suggesting a slight downwards trend since then. Indeed, despite firm growth in October and November, the sharp drop in December meant that sales edged down 0.2%Q/Q in Q4. The weakness in sales in December reflected several factors, including the accelerated spread of Covid-19, payback for strength in prior months when shoppers appear to have brought forward festive spending to try to dodge supply shortages, and the erosion of real disposable incomes by high inflation (nominal sales fell 3.1%M/M in December but were up 1.9%Q/Q in Q4).
Within the detail, sales volumes at non-food stores plunged 7.1%M/M in December, with declines in all major categories as footfall fell. Auto fuel sales dropped 4.7%M/M as increased WFH reduced travel. But food store sales fell a relatively modest 1.0%M/M as many consumers reduced their spending at restaurants. While the reporting period for the December data included Cyber Monday shopping (which took place on 29 November), the share of sales online increased only 0.3ppt to 26.6%, suggesting that the impact of Omicron on footfall was only a small part of the explanation for the weakness in sales at the end of the year.
While pandemic restrictions are coming to an end, the near-term outlook for spending hardly appears strong. Indeed, according to the latest GfK survey, UK consumer confidence deteriorated at the start of the year with the headline index dropping 4pts to an eleven–month low of -19, well below the long-run average but still well above the range throughout the first phase of the pandemic in 2020. All major categories weakened in the survey, with expectations for the economic outlook for the coming 12 months falling to the lowest in a year and expectations regarding personal finances down to a 14-month low as concerns mount about the “cost of living crisis”. The climate for making major purchases was also judged to have worsened, albeit merely matching October’s level, which was the lowest since last April. With real disposable incomes set to be eroded more significantly from April, when household energy bills will rise again along with National Insurance Contributions, and likely to decline this year by the most in a decade, retail sales might do well to move broadly sideways throughout the first half of 2022. However, in light of higher-than-expected inflation and the tight labour market, we maintain our expectation that the BoE will raise Bank Rate in February by 25bps to 0.50%.
Separately, BoE MPC member Catherine Mann will speak publicly today on the economy and monetary policy.
Consumer confidence set to have weakened further at the start of 2022
After yesterday’s French business survey highlighted the adverse impact on certain consumer-facing services at the start of the year, the Commission’s preliminary consumer confidence index for January due today is similarly expected to show that households remained downbeat at the start of the year after the surge in coronavirus cases during the festive period. Indeed, after a notable decline in December, the headline index is forecast to fall 0.7pt to -9.0, suggesting that consumers were the most downbeat since March. Separately, ECB President Lagarde will take part in a virtual panel discussion at the Davos Agenda discussing the global economic outlook.
Conference Board’s leading index due for release in the US
A quiet end to the week for US economic releases, with just the Conference Board’s leading and coincident indices for December due. Positive contributions to the leading index from initial jobless claims, higher yields, and the ISM new orders index should offset a negative contribution from weakening consumer expectations. As such, Daiwa America’s Mike Moran expects the index to rise for the 19th month out of the past 20, to leave the index more than 7 ½% higher than the pre-pandemic high in January 2020.