By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Of Calms & Storms
With Tropical Storm Nicholas expected in the Gulf of Mexico, Oil prices have been lifted on supply disruption risks. But apart from Oil and Oil-related FX boost (NOK, ZAR, MXN & RUB), it was really the calm (not just before the storm, but also) before US CPI that asserted itself.
Wall St was higher, snapping last week’s losses, led by 0.8% gain on Dow and 0.2% pick-up in S&P500 (although Nasdaq slipped 0.1%).
UST yields though dipped a touch ~1bp (in defiance of Oil), with 10Y at 1.33% while USD held its ground fairly well, leaving; EUR (just above 1.18), AUD (at mid-0.73), USD/SGD (low-1.34) and USD/JPY (around 110) mostly unchanged.
How US CPI is interpreted remains the focal point. While it may not take markets by storm, it is unlikely to be lulled into a lasting calm either ahead of FOMC next week.
The Inflation Puzzle & Predicament
Inflation confounds, frustrates, and ultimately constrains (policy and outlook) on a global basis. The puzzle is what entails “transitory” cost-push that may be given a wider berth.
But unpicking this puzzle does not absolve central banks of the greater predicament of choosing between;
i) ignoring pockets of excesses that exacerbate inequality and;
ii) risking a hard-landing that could entail balance sheet shocks (from yanking stimulus too soon).
While the basis of the inflation puzzle and predicament resonate across economies, the precise iterations of this differ somewhat; as may be observed from China, India and the US.
China’s consumer inflation at 0.8% YoY (falling from 1.0% in July) borders on dis-inflation while 9.5% YoY PPI (at 13-year highs) epitomises growing inflation risks.
Arguably, that is but a crisp representation of supply-side cost push juxtaposed against demand deficiency, which is suppressing consumer inflation (due to lack of demand-pull).
As we have published*, China’s huge manufacturing capacity alongside strategic stockpiles means cost-push pressures may be tackled quickly in the transmission process. Hence, PBoC need not be unduly worried about cost-push spill-over into inflation expectations.
Nevertheless, the puzzle of two starkly different inflation reads, depending on the point of measurement, underlines the policy predicament of correctly gauging, and mitigating, the greater risk to the economy.
And as finely tuned as Beijing’s suite of policy tools may be, it is still a tall order to ensure that these tools are deployed deftly enough to;
i) contain asset bubble/financial stability risks;
ii) without depriving the SMEs of much needed credit/liquidity, and;
iii) appropriately allocate resources to key/strategic industries to ensure the success of its “dual circulation” strategy.
Meanwhile, India’s inflation easing to 5.3% (from 5.6% expectations/July) may be a relief, but it is no less of a predicament. Fact is, macro stability risks aside, inflation is sufficiently elevated to tie the RBI’s hands on any inclination to mete out growth support.
The apparent puzzle as to why India’s inflation is so stubbornly and inconveniently higher than many of its peers (e.g. Indonesia) partly points to legacy supply-chain/logistics kinks.
Crucially though, it reflects a justifiable decision not to absorb costs via fiscal resources.
Upshot being, that fiscal constraints crimp monetary policy options, inadvertently increasing policy predicament; and the FX reserve accumulation is but a work-around to insure stability.
Finally, US inflation is exposed to the most intense debate on how “transitory” cost push may be; and whether the puzzle of rising wages and fragile demand may be resolved.
The Fed’s predicament however is less about whether or not to react to higher inflation, but rather one of timing and tempering (the pace of) of taper.
Specifically, the extent to which the Fed prioritises the deceleration in jobs over elevated inflation.
And so, (today’s) CPI data may be a source of volatility; as the headline print will have to be tempered for details and then weighed off against downside risks to jobs.
All said, the puzzle of uneven inflation getting ahead of demand is a policy predicament that monetary policy alone cannot adequately address; much less, resolve.
*Mizuho Chart Speak – Inflation, Why China is a Solution, Not a Problem; 9 June 2021
Credit: Mizuho Bank Ltd
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