Global Daily – Is inflation really back?

by: Bill Diviney , Aline Schuiling , Philip Bokeloh

US Macro: Core goods drives upside inflation surprise – US core CPI inflation surprised to the upside in January, rising 0.3% mom, above our and consensus forecasts (0.1% and 0.2%, respectively). The chief driver of the surprise was core goods, with an unusual jump in apparel, which rose the most since February 1990. While we had flagged recently (see here) that the drag from core goods was likely to ease this year given the recovery in commodity prices and the weaker dollar, the impact appears to be coming through more rapidly than anticipated. A further driver of the upside surprise was in transportation services, likely a reflection of the lagged pass-through from higher energy prices over the past year. Importantly for the longer term direction of core CPI, however, shelter, medical and other core services remained broadly within recent ranges, and do not yet point towards the tight labour market exerting an impact. Indeed, although we expect the tight labour market to lead to higher wage growth this year, rising investment and in turn productivity should dampen the impact of wage growth on unit labour costs, which are the main driver of core services inflation. With that said, a more rapid pass-through of higher commodity prices and the weaker dollar to core goods pose upside risks to our 1.7% forecast for core CPI in 2018, and will give the Fed greater confidence to continue with its quarterly pace of rate hikes for the time being. (Bill Diviney)

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Euro Macro: German economy to bounce back in first quarter of 2018 – The German economy lost some steam in the final quarter of 2017, with GDP growth declining to 0.6% qoq, down from 0.7% in Q3 (revised lower from 0.8%). No details of the components of economic growth have been published yet, but according to the Statistisches Bundesamt foreign trade was the main driver of growth, while private consumption stabilised, investment in machinery grew modestly and residential investment contracted. Looking forward, we expect GDP growth to re-accelerate in 2018Q1. Private consumption growth should pick up again, fuelled by robust employment growth, a rise in real wages and a robust housing market. On top of that, residential investment is expected to bounce back as the construction sector and housing market remain strong. Overall, we expect Germany’s economy to grow vigorously and outperform the eurozone total this year, as the cyclical upswing that is already in place will receive some extra fuel from expansionary fiscal policy. Indeed, new coalition government that is expected to take office soon plans to raise expenditure and cut taxes by a total of EUR 46bn during the next four years (around 0.3-0.4% GDP per year). (Aline Schuiling)

Dutch economy continues to outperform – In 2017, the Dutch economy reached its highest growth rate in ten years. GDP grew by 3.1%, after rising 2.2% in 2016. In the fourth quarter GDP increased by 0.8% qoq and 2.9% year-on-year. GDP-growth was broad based. All components contributed to growth. In particular the external sector did well, as exports of machines and chemical products rose rapidly supported by strong economic activity in the Netherlands’ main trading partner Germany. Corporate investment also picked up. Sentiment in the industrial sector recently reached a record high. This was reflected in increased investments in machines. Furthermore, the improvement of the housing and real estate market boosted construction investments. Thanks to the increase in investment, employment rose. In the fourth quarter the total number of jobs increased by 57.000. The labour market became relatively tight. Unemployment has dropped to 4.4%, the lowest level since 2009. The improved labour market supported consumption. Households spent 1.8% more than in 2016, above all on clothes, furniture and electrical appliances. (Philip Bokeloh)