Inflation data in focus this week

Emily Nicol

Japanese producer price inflation falls sharply in October amid lower energy prices
The overnight release of Japan’s producer price figures suggested a further notable moderation in pipeline pressures in the factory sector at the start of Q4. In particular, producer prices fell for a second-successive month in October, by 0.4%M/M. And with prices having risen by 1.0%M/M in October 2022, this left the annual rate of inflation down 1.4ppts to 0.8%Y/Y, the softest rate since February 2021 and almost 10ppts below last December’s peak. Admittedly, this principally reflected lower energy prices, for which petroleum and coal products fell 5.1%M/M to leave the annual rate of that component down 2.5ppts to 0.7%Y/Y. But the rate of inflation also moderated across a range of goods. And so, despite the upside inflationary risks posed by the weaker yen – e.g. imported prices in yen terms rose for a third consecutive month – subdued demand should allow lower input prices to feed through to lower consumer goods price inflation over coming quarters too.

In terms of economic activity, the first estimate of Japan’s Q3 GDP is due on Wednesday. Following strong growth in Q2 (1.2%Q/Q) and given subdued consumer spending and a modest negative contribution likely from net trade, GDP is forecast to have declined slightly on the quarter, by -0.1%Q/Q. While updated industrial production figures for September (Wednesday) are expected to confirm a modest rise on the month (0.2%M/M), this would still leave output in the sector down 1.3%Q/Q in Q3. Tertiary activity numbers (Friday) will offer more insight into conditions in the services at the end of Q3, while goods trades figures for October (Thursday) will provide an update on external demand at the start of Q4.

Updated euro area Q3 GDP data expected to confirm a modest contraction, but IP figures likely to report a marked decline in September
Tomorrow will bring an updated estimate for euro area Q3 GDP. In the absence of a significant downside surprise to GDP from the Netherlands (preliminary data also due tomorrow), this is likely to align with the flash release that saw euro area GDP contract by 0.1%Q/Q in Q3. Admittedly, euro area industrial production data (Wednesday) might well suggest a downwards revision to Q3 GDP in due course. Figures published so far by the larger member states have been mixed, but overall point to a decline of a little more than 1.0%M/M in September, which would leave industrial output down 1.2%Q/Q in Q3. Euro area goods trade figures for September (also due Wednesday) will offer further insight into the contribution of net trade to GDP in Q3. Despite weaker economic activity, the latest employment data (tomorrow) are likely to report another modest increase over the third quarter, albeit growth will be notable softer than the average pace of 0.4%Q/Q seen since the start of 2022. Separately, Germany’s ZEW investor survey (tomorrow) will offer an update on economic conditions in November. This is likely to echo the findings of last week’s Sentix indicators, that reported an improvement in investor expectations for the outlook but implied still very challenging conditions in the middle of Q4.

The euro area’s data calendar will conclude on Friday with the release of updated euro area HICP figures for October. In the absence of revisions to the French, Italian and Spanish estimates (due Tuesday and Wednesday), these are expected to confirm findings from the flash release that saw headline inflation drop 1.4ppts to a 27-month low of 2.9%Y/Y and core inflation decline 0.3ppt to a 15-month low of 4.2%Y/Y. While the drop was driven by base effects associated with last year’s energy price spike, the granular detail will also likely suggest a broad-based easing in underlying price pressures.

UK inflation set to take a notable step down in October amid a marked decline in energy, but also a softening in core goods inflation too
It will be a busy week ahead for top-tier UK releases, including the latest labour market figures (tomorrow), inflation data (Wednesday) and retail sales (Friday). Perhaps most notable will be inflation, with the October CPI release to report a notable drop in the headline rate due principally to energy inflation amid the decline in Ofgem’s household energy bill cap. Indeed, with consumer prices expected to have increased in October at just a fraction of the 2%M/M jump this time last year, we forecast headline inflation to fall around 2ppts to 4.7%Y/Y, which would mark the lowest for two years. While energy will provide the principal drag and food inflation is expected to fall for a sixth successive month, we also expect an ongoing disinflationary trend in non-energy industrial goods inflation to a two-year low as well as a modest easing in services inflation (albeit still at an elevated level of 6.7%Y/Y). As such, we forecast core inflation to decline a further 0.4ppt to a 19-month low of 5.7%Y/Y. Meanwhile, given the improvement in households disposable incomes and the weakness reported over the summer, we might expect to see some payback in retail spending in October. But surveys suggest that sales remained weak for the time of the year at the start of Q4. And so, any bounce back last month will lack vigour.

Given the suspension of the Labour Force Survey, the ONS’ new experimental unemployment and employment figures – based on HMRC Pay as You Earn figures and the claimant count – will be viewed with some skepticism. But these should nevertheless signal a further loosening in the labour market in September, with the claimant count having risen by around 20k that month and the number of payrolled employees having declined for a third successive month (-11k). Despite evidence of a looser labour market and surveys – like last week’s REC report on jobs – suggesting slowing wage growth, average weekly earnings growth is forecast to have remained elevated in the three months to September, with regular pay growth expected to have moved sideways at 7.8%3M/Y. Total wage growth, however, is forecast to have taken a step down in September, to a four-month low of 7.4%3M/Y.

US CPI inflation expected to have eased amid lower energy prices, but core inflation to have moved sideways
Ahead of a potential US government shutdown at the end of this week, the key data focus in the US will be October’s CPI print tomorrow. Consumer prices are expected to have risen just 0.1%M/M, the softest pace for five months and down from 0.4%-0.6%M/M in the previous two months. This would see the annual CPI rate drop 0.4ppt to 3.3%Y/Y, still a touch firmer than the recent low reached in June (3.0%Y/Y). But this will principally reflect lower energy prices. Indeed, when excluding energy and food, core prices are expected to have risen 0.3%M/M, which would leave the annual rate unchanged at 4.1%Y/Y. Meanwhile, retail sales figures for October (Wednesday) are expected to report that sales fell for the first month in seven (-0.3%M/M), as payback for the strength seen over the summer, lower fuel prices weighed on the value of sales and softer consumer demand weighed on spending. When excluding autos and motor fuel, sales are expected to have risen 0.2%M/M, down from 0.6%M/M in September. In addition, industrial production figures (Thursday) are expected to report the first monthly decline (-0.3%M/M) since June, with auto production to have been hit by strikes that month.

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