Market Mover - BNP PARIBAS - Investment Services India

Global Inflation Watch
Large jumps in headline inflation over
In the US, UK and eurozone, headline inflation has
risen sharply over the past six months. As the sharp
falls in food and energy inflation at the end of 2008
have dropped out of the y/y comparison, it has
mechanically pushed headline inflation up from its
lows last summer. In the US and UK, headline CPI
and RPI inflation have risen by around 5pp in just six
months, reaching 2.7% and 3.5% y/y respectively in
December. Eurozone CPI inflation gained around
2pp over the same period to reach 0.9% y/y at the
end of last year.
The bulk of the base effects, however, are now past,
and, on our forecasts, headline inflation is fast
approaching its peaks for the year in all three
countries.
This should be evident in this week’s US CPI release,
where a 0.3% m/m print that we are expecting for the
month would lift the y/y rate by just 0.1pp to 2.8%. In
the breakdown, we expect energy prices to have
risen by 2.4% m/m, and food CPI by 0.2% m/m.
Core inflation, meanwhile, should rise by 0.2% m/m.
Underlying price pressures remain contained, but
metal prices have been trending higher in recent
months, and having surfaced in import and producer
price inflation, have scope to have an impact on the
CPI too. Auto prices would probably be the first CPI
component to be affected by this upside risk.
Otherwise, sluggish shelter prices and plummeting
unit labour costs suggest underlying price pressures
will remain contained.
In the UK, the CPI should post a final month of
accelerating inflation during January. The big story
this month is the return of the rate of VAT to 17½%.
Given the extent of the upward surprise last month,
there is a suggestion that some firms have already
passed on the VAT hike early. However, we also
believe that conservative management of Christmas
inventories has meant that the degree of discounting
was probably less generous than last year.
If there is full pass-through of the VAT hike, this could
add a full percentage point to y/y inflation. However,
several retailers have reported that they will not pass
on the VAT hike, while others have said it will be
deferred. Hence we expect a near ¾%pp addition in
January.
RPI inflation is likely to rise slightly more sharply, not
least given accelerating house price inflation and
base effects related to the mortgage interest
component.
Chart 1: Headline Inflation (US, EZ, UK)
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: US Core CPI & ULCs
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: UK CPI vs. RPI
Source: European Commission, BNP Paribas
Luigi Speranza/Eoin O’Callaghan 12 February 2010
Market Mover
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