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By HaleStewart December 17, 2017 7:08 am
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International Economic Week in Review: England May Have an Inflation Problem

            In general, the good news continues.  The EU economy has now been reporting positive news for over a year.  Japanese and Australian indicators also paint a positive picture.  The UK, however, may have problem.  CPI was 3.1%, which the BOE attributed to a weak sterling.  However, granular CPI data in this week’s report showed price increases in a variety of sub-categories.  It’s difficult to attribute the breadth of the increases to a weaker currency.

            The Bank of England has a potential inflation problem.  Earlier this week, the ONS reported that CPI increased 3.1% Y/Y.  The Bank maintains that the sterling’s decline is largely responsible.  In Wednesday’s interest rate press release they argued: “It remains the case that inflation has been pushed above the target by the boost to import prices that resulted from the past depreciation of sterling.”   This undoubtedly is a contributing factor:

The pound declined ~25% versus the dollar since 3Q14 (top chart) and ~13% versus the euro since 2016 (bottom chart).  However, a broad range of sub-components contributed to inflation’s increase: 

As for the overall economy, the Bank argues it is in strong shape:

The steady erosion of slack over the past year or so has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target.  Consequently, at its previous meeting, the MPC judged it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to the target, while continuing to provide significant support to jobs and activity.  At this meeting, the Committee voted unanimously to maintain the current monetary stance.  The Committee remains of the view that, were the economy to follow the path expected in the November Inflation Report, further modest increases in Bank Rate would be warranted over the next few years, in order to return inflation sustainably to the target.  Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent.  The Committee will monitor closely the incoming evidence on the evolving economic outlook, including the impact of last month’s increase in Bank Rate, and stands ready to respond to developments as they unfold to ensure a sustainable return of inflation to the 2% target.

This is similar to the Federal Reserve’s assessment of the US economy.   However, it also assumes that Brexit’s impact will be muted to non-existent, which is difficult to reconcile with basic economic theory.

            At their latest meeting, the ECB voted to maintain their current policies.  They offered the following assessment of the EU economy:

The economic expansion in the euro area continued in the third quarter of 2017, when real GDP increased by 0.6% quarter on quarter, after 0.7% in the second quarter. The latest data and survey results point to solid and broad-based growth momentum. Our monetary policy measures, which have facilitated the deleveraging process, continue to support domestic demand. Private consumption is underpinned by ongoing employment gains, which are also benefiting from past labour market reforms, and by rising household wealth. Business investment continues to strengthen on the back of very favourable financing conditions, rising corporate profitability and strengthening demand. Housing investment has also risen further over recent quarters. In addition, euro area exports are being supported by the broad-based global expansion.

Data released this week confirms the bank’s positive assessment.  3Q employment for the euro area increased .4% Q/Q and 1.7% Y/Y.  More importantly, the pace of Y/Y gains is rising:

Industrial production rose .2% M/M and 3.7% Y/Y.  This metric continues to increase strongly:


Three of the four major euro areas grew Y/Y: Spain +.6%, France +1.8%, and Italy +.5%.  Only Germany contracted; they decreased 1.4% Y/Y.  Finally, the latest Markit press release was a blockbuster report: the manufacturing index was 61, the highest reading since Markit began this series 212 months ago.  The service’s PMI of 56.6 was an 80-month high while the composite reading of 58 was an 82-month high.     

            Japanese news was positive.  Industrial production – which was very weak on a Y/Y level last month – rebounded to a 5.9% Y/Y pace.  This was the sixth strong reading in the last seven months:

The flash reading of the Markit PMI rose to a 46-month high and the latest Tankan survey form the BOJ also showed improvement in the sentiment across small, medium and large companies. 

            Finally, the Australian unemployment rate was unchanged at 5.4%. 

            Next week, the Bank of Japan will release its latest interest rate decision.  We’ll see GDP news from Canada and the UK and inflation data statistics from the EU. 

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 





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