This week is all about inflation: China and the United Kingdom will release their consumer prices indices numbers tomorrow (different time zones of course), and the United States CPI will be out on Thursday.
For China and the United Kingdom, brace for bad figures of inflation for both of the countries, as both will be high. For China, consensus expected inflation to rebound in January to 5.5% from 4.6% in December. Several things to bear in mind for China inflation. First of all, we should not be surprised on why inflation is high in China because of its overly loose monetary policy over the past 2 years, with faster than desirable growth in money supply. Secondly, when you look at the components of the consumer price index, large chunk of it is now due to food prices (but who to blame for high global food prices? The weather or Ben Bernanke?). “Thanks” to the weather, we will probably see food prices to go higher still in the months to come. Here, I expect more tightening in the forms of interest rate hikes in the months to come as China is combating the potentially runaway inflation and real estate bubbles.
For United Kingdom, we have already got a taste of how the January inflation would look like: extremely nasty. The producer price index came out last week rose twice as fast as the consensus estimated, with input prices rose 13.4 per cent. Due to the increase in VAT in January, consensus is now looking for a 4.0% annual rate for the headline number, rising from 3.7% in December, and 3.1% for core inflation. Last week, the Bank of England put the interest rate on hold and asset purchase unchanged amid weak economic growth figure, but as Mervyn King keeps writing letters to the Chancellor of the Exchequer explaining why inflation is above the 2.0% target for such a long time, one should be prepared for interest rate hike at the time when the government is carrying out their austerity measures and the economic outlook is gloomy.
For the United States, the consensus is looking for 1.6% headline inflation rate, and 0.9% rise excluding food and energy. As mentioned before, we are looking seeing a Tale of Two Inflation, with various figures such as the ISM Manufacturing Prices index pointing to a higher headline inflation number while the core inflation still trending downward so far. Although it might seems as though Ben Bernanke is only focusing on the core inflation, thus he will hardly change the policy course, the bond market has been suggesting the otherwise even two months ago. What the bond market is say is either that the economic growth will be faster, or the inflation will go higher, or they are less confident about the public finances of the United States, or all three. As such, if inflation was higher than expected, it may be interpreted by the market as a bad news, as it will suggest that the Federal Reserve will exit quantitative easing earlier than people like, even Ben Bernanke might personally want to do QE3.
I will have more to say as these data are released.