Market Outlook - BNP PARIBAS - Investment Services India

Global Inflation Watch
Very Weak German CPI Data
Wednesday’s large downward surprise to German
inflation constituted the latest piece of evidence that
policymakers should be far more worried about
deflation rather than inflation in the euro area. The
national headline CPI fell by 0.6% m/m in January,
double the -0.3% m/m print expected by the market
and weaker than our own -0.5% m/m estimate. That
left the y/y rate flat at 0.8% y/y after three straight
months of big gains. The HICP numbers were even
weaker at -0.7% m/m, 0.7% y/y.
There were two key drivers of the downward surprise
relative to consensus. First, the increase in energy
prices in January was weaker than the country’s fuel
data had implied. Second, and much more
importantly, there was a very weak core inflation
print. Based on the five states’ data, we estimate
core inflation decelerated to 0.8% y/y in January from
1.1% in December at the national level – its lowest
level since October 2006.
Chart 1: German Clothing CPI (% m/m), Sliced*
Source: Reuters EcoWin Pro, BNP Paribas *Lines show past 5 years %m/m
changes between January and December.
Chart 2: Eurozone HICP (% y/y)
The cut in VAT on restaurants that took effect this
month played a small part in this fall. Rather, the
softness of core was relatively widespread, with
evidence of particularly aggressive discounting in
clothing prices – which dropped by double their
previous record fall (Chart 1). That alone sliced 0.2pp
from core inflation over the month.
Following the German data, we have revised our
estimate for today’s eurozone flash HICP release.
We now expect headline inflation to print 1.1% y/y,
still up 0.2pp from December thanks to upward
pressures from food (cold weather) and energy (oil
price rises in January). We had core inflation ticking
0.1pp lower to 1.0% on strong seasonal discounting,
but following the larger than expected decline in
German core inflation, our estimates suggest we
should see a 0.9% y/y – which would equal the
series’ all-time low recorded in 2000.
This week’s data calendar includes the Japanese
CPI for December. The rate of decline in the national
core CPI has steadily moderated for three straight
months, coming in at -1.7% y/y in November from a
low of -2.4% in August. We expect this trend to
continue with the inflation rate forecast at -1.4% y/y in
December. But the moderation in the decline in the
CPI does not reflect the easing of deflationary
pressures, rather it is just a technical reaction to
falling petroleum product prices a year earlier. This
factor should continue to temper the CPI’s rate of
decline in January, after which the fall in the CPI will
re-accelerate as base effects fade.
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Japanese CPI (% y/y)
3
Core CPI
2
1
0
-1
CPI excluding energy and food, but not alcohol
-2
-3
02 03 04 05 06 07 08 09
Source: MIC, BNP Paribas
Luigi Speranza/Eoin O’Callaghan 29 January 2010
Market Mover
40
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