February 15, 2021

Macro Series

Key Developments & Chart of the week

BY Preston Llewellyn

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( 4 mins)

The virus still drives G7 GDP, while the US and China record no significant inflation.


 

 

Outcome

Previous

Comment

China CPI (Jan; y-o-y)

-0.3%

0.2%

No signs of consumer price pressures

China PPI (Jan; y-o-y)

0.3%

-0.4%

First positive reading since Feb 2020

US core CPI (Jan; y-o-y)

1.4%

1.6%

No evidence for inflation concern

UK GDP Q4 (QoQ; preliminary)

1.0%

16.1%

Renewed lockdown hits recovery

 

 

 

 

 

 

 

 

 

 

 

China inflation

  • CPI inflation slipped back into negative territory (somewhat distorted by the timing of Lunar New Year), while PPI inflation turned (modestly) positive for the first time since the start of the pandemic, driven by continued resurgence in manufacturing activity and costs of raw materials.
  • The divergent inflation performance is perhaps a sign of unbalanced recovery – consumer demand has recovered significantly less rapidly than output.

US CPI

  • That core inflation was unchanged on the month indicates no signs of inflationary pressures. The modest, 0.3% m-o-m rise in headline CPI owed largely to rising prices of fuel.
  • Monthly data thus show no inflationary pressures so far. Y-o-Y (headline and core) will pick up between March and May when monthly negatives from previous 12 months drop out.

UK GDP

  • The UK economy remains firmly in the grip of the virus.
  • Moreover, of the G7 economies, the UK is furthest below its 2019 peak – although this may be exaggerated by its exceptional and debatable way of measuring output in some services.

Bottom line: no challenge so far in the hard data to our World View 2 – neither on the output 3 nor on the inflation 4 fronts.


Chart of the week. US 10-year breakeven inflation rate: reaching a 5-year high in February.

  • Markets are starting to fret a little about future US inflation.

Key Developments & Chart of the week 1


 

  1. Key Developments presents what in our judgement represent the past week’s most important individual data and other developments. These are selected, in an attempt to counteract the risk of Kahneman ‘confirmation bias’, as those best able to reveal the extent to which the key assumptions and relationships that underpin our World View remain valid – or not, as the case may be. Generally we feature hard data rather than forecasts or survey results; but make exceptions in important cases.
    This approach is particularly important at present because the shock that has hit economies and markets is both large and novel, twin conditions that typically challenge understanding and lead to unusually large forecasting errors.
  2. We will be publishing our World View, replete with full underlying argument and supporting evidence, in the coming days.
  3. We expect GDP growth this year to continue strongly in China, but elsewhere only once the vaccines restore a ‘new normality’. Historically, post-recession growth is slower for several years than its prior trend: re-attaining the pre-recession GDP level takes a number of years.
  4. As regards inflation: while the aggregate price level in different economies may spike from time to time, capacity and labour markets are generally not strained, and it seems unlikely that such shocks as may hit the aggregate price level will turn into a price/wage spiral. Markets are fretting a little about future US inflation in the context of the big Biden package; but with inflation constrained everywhere elsewhere, international price competition stands to keep a lid on inflation globally – and perhaps even curb any incipient price pressure in the US. For more, see our just-published Rising US inflation concerns, 12 February.

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