Inflation still rising in the US, but starting to ease in China

US Macro: Another upside inflation surprise, despite drags from oil and gas

Inflation surprised again to the upside in December, with headline up 0.5% m/m and core rising 0.6% (consensus/ABN: 0.4%/0.2% and 0.5%/0.4% respectively). Annual inflation picked up to 7% y/y from 6.8% in November, while core jumped to 5.4% from 4.9%. The details suggest few signs of inflationary relief, with the drag from falling oil and gas prices dwarfed by continued exceptional strength in core goods and services inflation. Used cars were once again a major contributor, rising 3.5% m/m, but new cars (+1%) and apparel (+1.7%) also rose very strongly. On the services side, shelter and eating out continued to show robust gains of 0.4% and 0.6% - well above normal rates of price growth in these categories - with the only notable drag on the services side coming from car insurance.

Inflation forecasts raised, with risks still to the upside

The continued upside surprises to inflation, alongside very strong pipeline pressures from both producer prices and the labour market, have led us to significantly raise our inflation forecasts for 2022. We now expect headline CPI inflation to average 4.6% in 2022, up from 3.9% previously. For the Fed's preferred measures of PCE inflation, we expect headline at 4.2% and core at 4.1% (previously: 3.2% and 2.9%). While we still expect the easing of supply-side bottlenecks and a cooling in demand to drive a significant move lower in inflation in the course of 2022, core inflation is likely to remain well above the Fed's 2% target, ultimately settling in a 2.5-3.0% range by early next year. As 2022 progresses, we expect a drag from core goods prices (mainly used cars) to be increasingly offset by higher services inflation. Last week's payrolls report indicated an exceptionally tight labour market, with wage growth at 5.8% on a 3m/3m annualised basis. Such strong wage gains are only just starting to impact services inflation, and we expect the labour market to become a bigger - and more durable - driver of inflation in the months ahead. This strengthens the case for the Fed to start raising rates in March, and for it to begin balance sheet runoff shortly after in late Q2. (Bill Diviney)

China Macro: Inflationary pressures ease

China’s inflation figures for December published yesterday point to an easing of inflationary pressures. Producer price inflation (PPI) came down by more than expected, falling to 10.3% yoy in December (November: 12.9%, consensus: 11.3%). This is in line with our view that PPI inflation has peaked and will come down this year, although additional (supply) disturbances from Omicron could delay this process. As we explained in our China Outlook for 2022, the acceleration in PPI in the course of 2021 was largely driven by commodity-related sectors, aggravated by a domestic power crunch in September/October. A relaxation of energy policy in Q4-2021 has already contributed to an easing of energy-related bottlenecks and a downward correction in energy and other commodity prices. This was also reflected in a sharp decline in the manufacturing PMI’s sub-indices for input and output prices in recent months.

Meanwhile, consumer price inflation dropped back to 1.5% yoy in December (November: 2.3%, consensus: 1.7%), mainly driven down by food prices. Core inflation was stable at a relatively subdued level of 1.2% yoy. We expect CPI (and core) inflation to pick up somewhat in the course of this year, but to remain well below the PBoC’s target of around 3%. All in all, the latest inflation developments provide room for the Chinese government to continue with piecemeal, targeted easing of monetary policy in our view. We expect further mini cuts of some policy rates and bank reserve requirement ratios. (Arjen van Dijkhuizen)