Global Daily – US reflation on pause

by: Bill Diviney , Aline Schuiling

US Macro: Inflation recovery is taking longer – CPI inflation was a mixed bag in January, with firming headline inflation (+0.3% m/m) – driven entirely by the rise in oil prices – contrasting with zero core inflation. On an annual basis, headline inflation was stable at 1.4% y/y, while core inflation fell back to 1.4% from 1.5% in December. Digging into the details of core CPI, strength in apparel and medical care services was more than offset by ongoing weakness in shelter, and a renewed fall in airfares. The weakness in airfares is to be expected given that demand for air travel has fallen away again in recent weeks (passenger throughput is now running at around 1/3 of normal levels, compared to over 40% in December). However, we expected shelter (which makes up 42% of the core CPI basket) to exhibit more of a recovery at this point, given that the broader housing market has rebounded exceptionally strongly over the past few months. We still expect catch-up growth in rents in the second half of the year, once the economy fully reopens and the recovery gains momentum, but in the meantime this component will remain a drag on inflation. Overall, and in contrast with the significant rise in market-based inflation expectations, inflationary pressure remains subdued. Base effects will push annual headline inflation temporarily higher in April-May, while catch-up growth in rents and some other services components will likely drive a more meaningful recovery in core inflation in the second half of the year. But as we discuss in our US Outlook, a sustained rise in inflation will require a pickup in survey-based inflation expectations, and this will take much longer to achieve – even with exceptionally accommodative monetary and fiscal policy. (Bill Diviney)

Euro Macro: Industrial production growth slowing down – A number of big eurozone countries published industrial production data for December over the past few days. In Germany industrial output stabilised in the final month of 2020, while in France it contracted by 0.8% mom and in Italy it fell by 0.2%. Spain was a positive outlier, with production growing by 1.1% mom in December, but this followed a 0.9% contraction in November. All in all, the numbers clearly signal that production growth slowed down noticeably in Q4, following the sharp rebound in Q3, when production in the eurozone jumped up by 16.5% qoq. Within the group of big countries that have published December data, Germany recorded the strongest rise in production in Q4 (+6.2% qoq), followed by France (+ 2.5%) and Spain (+1.2%). In Italy, production declined by 0.8% qoq in Q4. Looking forward, we think that the eurozone industrial sector will continue to contribute positively to overall GDP growth throughout this year, although lockdown measures will probably slow down the growth rate somewhat in the first half of the year. A more detailed outlook for GDP growth, the labour market and inflation in the eurozone, as well as our views on the stance of fiscal and monetary policy can be found in our Eurozone Outlook 2021(here). (Aline Schuiling)