Global Inflation Update: Signs of a Recovery?

Inflation is THE key metric that most central banks use for determining the direction of monetary policy, which is why prudent forex traders always strive to keep themselves updated on this topic. And so without further ado, here are the most recent inflation readings from the major economies.

As y’all can see, most of the major economies still have very low headline inflation levels, but core inflation in the U.S., Canada, and China are already rather healthy. Still, it’s best to dig a little deeper by taking a look at the historical trends and the main drivers for inflationso let’s do just that, shall we?

The U.S.

U.S. headline CPI finally saw a slight uptick after 5 months of negative or flat readings. Based on the report from the U.S. Bureau of Labor Statistics, the main drag for June’s CPI is still the energy component, which declined by 15.0% year-on-year.

Looking at the sub-components, fuel oil led the downhill charge by printing a 1.9% monthly decline and a 27.7% yearly decline. Gasoline is also still a drag, declining by 23.3% year-on-year, but it’s beginning to show some promise on a monthly basis because it climbed by 3.1% in June and a whopping 10.4% back in May. In fact, gasoline was the primary driver for June’s uptick.

Canada

The main driver for Canada’s headline June CPI was a 3.4% increase in food prices and a 1.0% increase in the shelter index. The main drag, meanwhile, was the 2.6% slide in the transportation index due to a 14.1% slump in gasoline prices.

The U.K.

You could almost hear forex traders gasp in disappointment when the U.K. posted a zero for June’s headline CPI since that threatened to invalidate the Bank of England’s forecasts in the May Inflation Report that a dip into negative territory would be temporary.

In any case, deflationary pressures from lower oil prices aren’t as much of a drag on the British economy since transport services were the largest upward contributor to headline CPI at +0.20%. Recreation and culture, meanwhile, was the largest drag at -0.08%. The Brits weren’t too keen on hitting the pubs too since the “alcohol and tobacco” component was the second biggest drag at -0.04%.

The Euro Zone

The preliminary estimate for July’s headline inflation in the euro zone is in and it promises to show stability at 0.2%. The main inflation components are expected to rise across the board, except for energy, which is expected to be the main drag with its 5.6% drop (-5.1% previous).

Switzerland

Switzerland is a unique case due to its horrible inflation levels and the fundamentals explaining them. Basically, it all boils down to the strong Swissy brought about by the floor on EUR/CHF being removed back in January of this year. A stronger Swissy makes Swiss exports less desirable while making imports pretty cheap, which further pushes domestic prices down in order to compete. In any case, the main drag for June’s CPI was a 3.7% decrease in transport prices while a 1.2% increase in education costs tried to stop the bleeding.

China

Despite the economic slowdown, the latest inflation data from China (released with the government’s seal of approval) remained robust due to solid domestic consumption. Food, which contribute roughly 30% to CPI remained in high demand, with vegetable prices increasing by 11.4% and pork prices increasing 7.0%.

Japan

As I discussed in my economic round-up for Japan, energy prices still seem to be the problem in the country since the main drags to inflation were “fuel, light and water charges” and “transportation and communication,” which decreased by 3.1% and 2.0% respectively. The main upward contributor, meanwhile, was the 2.5% increase in food prices.

One thing worth noting when looking at the historical trend is that readings before April 2015 got an artificial boost from the 8.0% consumption tax. Just subtract 2.0% from the readings and you should be good to go.

Australia

The main drivers for Australia’s robust Q2 inflation levels were a 4.8% year-on-year jump in alcohol and tobacco prices, a 4.3% increase in the health, and a 5.4% rise in education. The main drags were a 3.4% drop in the communication component and a 2.4% slump in the transport index. On a quarterly basis, the transport index was actually a major positive contributor, with its 3.4% quarter-on-quarter increase due to an 11.6% increase in automotive fuel.

New Zealand

On a year-on-year basis, the uptick in Q2 inflation levels was brought about by an incredible 14.0% increase in cigarette and tobacco prices due to a higher excise tax. And like Australia, lower prices for telecommunications services was the main drag, with its 4.3% decline. On a quarterly basis, the primary driver for inflation was the transportation component due to an 8.8% increase in petrol prices and a 11.0% increase in diesel prices.

Summary & Potential Effects on the Forex Market

Overall, lower oil prices are still a drag on most of the major economies, but monthly or quarterly readings show that their negative effects are being shaken off. Whether or not this trend will continue is yet to be seen, but we are already seeing potential obstacles in the way.

As for their effect on the forex market, rising inflation means a higher chance of tightening policy (e.g. rate hikes) while declining inflation means a higher chance of easing (e.g. rate cuts), and expectations for a rate hike (or a rate cut) are major drivers for forex price action. In fact, expectations for a rate hike has been keeping the Greenback supported despite not so optimistic U.S. data.