Inflation in focus with US, EMU, and Japan to provide updates - BBH

In the week ahead, the US, EMU, and Japan will provide inflation updates as the US reports the August reading of the Fed's preferred measure the core PCE deflator on September 29, explains the analysis team at BBH.  

Key Quotes

“If the median forecast of 0.2% materializes, it would be the largest monthly increase since January.  However, due to the base effect, it is not enough to lift the year-over-year rate from 1.4%.  In our view, which is informed by the July FOMC minutes and comments by the Fed's leadership, there is greater emphasis on financial conditions that blunt part of the implication of the softer inflation figures in shaping the policy debate.”

“The eurozone provides a preliminary estimate of September consumer inflation.  The headline rate is expected to have risen to 1.6% from 1.5%.  It finished last year at 1.1%.  The core rate is expected to be unchanged for the third month at 1.2%.  It finished last year at 0.9%.”

“In many ways, the debate about what the ECB does going forward has been decoupled by the short-term vagaries of CPI.  Without knowing specifics, investors do know a few things.  First, the asset purchases will not stop suddenly.  That means the asset purchases will continue into 2018.  Second, since the first reduction was from 80 bln to 60 bln, many are thinking regarding bln of euros rather than in percentage terms.  A reduction of another 20 bln seems to be the most favored scenario.  Third, Draghi has indicated that rates will not be lifted until after the asset purchases are complete.  The unknowns are with the devil in the details.”

“The US and EMU preferred inflation measures are not expected to show much movement, but Japan's may be a different story.  Inflation is slowly rising in Japan.  The BOJ targets the core rate, which excludes fresh food from the headline.  It has steadily, albeit slowly, rising this year.  It finished last year at minus 0.2%.  It stood at 0.5% in July and is expected to have risen to 0.7% in August.  The headline rate is also expected to have risen to 0.7% (from 0.4%).”

“The firmer price pressures, coupled with stronger domestic consumption (look for a strong household spending report) and foreign demand (18% year-over-year increase in August exports), puts the world's third-largest economy in a sweet spot that has been so elusive.  If anything, a snap election may bring forward some new spending initiatives (though the real new spending may be limited).  That is the fiscal arrow of Abenomics.”