Global Daily – What’s going on with US inflation?

Both headline and core inflation rose 0.9% month-on-month, taking annual headline inflation to 5.4%, and core inflation to 4.5%, far exceeding our and consensus forecasts (ABN: 3.9%; consensus: 4.0%). However, the overshoot continues to be mostly driven by used and new cars, with the price of used cars now up over 45% (!) yoy. All told, both new and used cars contributed over 2pp to annual core inflation in June; in other words, if we strip this out, inflation is running at a far less remarkable 2.4% yoy. While this is still a little above the Fed’s 2% target, it is to be expected given the significant shortfall in inflation last year, and reflects catch-up growth in components that were very weak during the pandemic (such as housing rents, clothing and airfares). In level terms, these categories are still running below their pre-pandemic trend.

The pickup in core inflation excluding autos is far less remarkable (lhs), while inflation expectations have stabilised (rhs)Left figure: CPI inflation, % yoy; Right figure: Inflation expectations, % yoy

Source: Datastream, ABN AMRO Group Economics

Autos could become a drag on inflation in coming months – With demand for cars now cooling – sales fell in May, and June retail sales are likely to show a further fall when they are published on Friday – the upward push from autos on inflation could well go into reverse in the coming months and become a drag. A compounding factor is likely to be improvements in supply, as bottlenecks (for instance in semiconductors) ease. A looming drag from autos will be partially offset by continued catch-up growth in services categories of inflation, but June is likely to represent the peak in both monthly and annual inflation. A further factor supporting the ‘transitory’ view on the current inflation overshoot is inflation expectations. Market-based expectations are around 20bp off highs in mid-May, and the University of Michigan consumer-based expectations have stabilised at levels consistent with the Fed’s 2% objective. All of this does not mean there are no risks to the inflation outlook. In particular, labour market bottlenecks continue to be a concern in the US, and it remains to be seen how quickly labour supply will catch up with demand as unemployment benefit top-ups expire, and schools and childcare facilities fully reopen. However, our base case is that these bottlenecks will not be sustained for long enough to put meaningful upward pressure on inflation. (Bill Diviney)

China Macro: A closer look at the buoyant foreign trade data – This morning, China’s foreign trade data for June came in stronger than expected. Exports in dollar terms rose by 32.2% yoy in June (May: 27.9%, consensus: 23.0%), while imports grew by 36.7% (May: 51.1%, consensus: 29.5%). Month over month, exports grew by 6.6% in June and imports by 5.3%. The June data suggest that China’s strong export performance during the pandemic is still holding up. This reflects the clear rebound in external demand following the reopenings of China’s main trading partners’ economies, but likely also price effects. Specific demand for medical supplies and IT products has for long been a key driver of this outperformance during the pandemic, but this effect has faded as the pandemic has shifted into a new phase. Going forward, export growth will likely drop in the second half of the year, as is also indicated by recent weakness in China’s PMI export-subindices. This partly reflects base effects, while supply side bottlenecks (e.g. scarcity in semi-conductors and in containers and container ships) will continue to be a headwind. Drags will likely also arise from virus flare-ups with more aggressive new variants leading to a retightening of restrictions, particularly in importing countries that are laggards in terms of vaccinations. Meanwhile, ongoing strength in Chinese imports confirms the pick-up of investment – with consumption still lagging – but also reflects the sharp rise in commodity prices (with China being the largest importer of commodities worldwide). Indeed, China’s volumes of commodity imports (data of which also runs to June) in recent months paint a less buoyant picture than total import values do. (Arjen van Dijkhuizen)

Source: Datastream, ABN AMRO Group Economics